Misdirection relies on the lazy eye. Or lazy brain. In either case, the magician masters the art of deception through misdirection: One hand draws the attention of the audience while the other furtively retrieves the device that appears like magic. Con men learn the same trick.
When it comes to fees, 401(k) plan sponsors might want to read up on the magician’s textbook (see “The Meat and Potatoes Topics of 401k Plan Sponsor Training: Fiduciary Education Curriculum (Part II),” FiduciaryNews.com, May 14, 2019). If they’re not careful, they’ll discover low fees may be the hand that deceives them. Following this false siren can leave them exposed to unwanted fiduciary liability.
The DOL was well aware of the potential ruse of low fees when it released the final version of its 2012 Fee Disclosure Rule.
Well, to be honest, at first they weren’t. I recall speaking to them one afternoon shortly after they came out with the initial draft of the rule. I asked, “So now the DOL is in the investment management business.”
They had no idea what I meant.
Before you get to the end of this piece, you’ll find out what I told them.
I’ll begin with the end. The DOL was careful, in its Final Rule, to remind plan sponsors to avoid chasing the lowest fee. The real measure wasn’t the single dimension of fees, but the multi-dimension of fees and value. A fee in isolation means nothing. A fee in combination with value derived means everything.
Consider this: Which car offers more value, the one that’s fully loaded or the one that’s stripped down? Certainly, the fully loaded model provides more value. If both cars cost the same, you’d definitely choose the fully loaded version. If the stripped-down version cost a dollar less, you’d likely still pick the (higher cost) fully loaded version. At some lower price point, you might choose the stripped-down car. That would entail a decision on your part that concludes the added features and benefits of the fully loaded car aren’t justified by its higher cost.
This is the same exact thought process the DOL wants plan sponsors to go through when they assess the value and cost of the plan service providers. A provider that offers higher value should be selected when the fees are the same versus a provider that offers lesser value.
If the lesser value provider costs a dollar less, it’s still likely the plan sponsor should pick the high value (and high cost) provider. Failure to do so means the employees would receive lesser value. Who’s on the hook for this inferior value? The plan’s sponsor.
In other words, hiring a lower cost provider that doesn’t provide adequate value to the employee increases the plan sponsor’s fiduciary liability.
There’s another area where low prices can be deceiving. This also explains how the DOL nearly inadvertently entered in the investment management business.
When I spoke to them, I began by asking, “Should the plan sponsor always choose the lowest fee?” They answered, “Of course.”
Those who know a bit about the pricing structure of the various asset classes know where this is headed.
Having lured them in with the primacy of lower fees, I then concluded, “So you’re saying all 401(k) plans should only offer money market funds.”
“No, we’re not saying that at all,” that quickly countered.
“But you just said the plan sponsor should only select providers with the lowest fees,” I explained. “Assuming we’ve eliminated all conflict-of-interest fees, money market funds have the lowest operating costs. Bond funds have slightly higher costs. Equity funds have the highest costs, with international funds topping the list.”
“That’s not what we we’re saying,” replied the now beleaguered DOL media contact. “That’s not what we’re saying at all.”
Plan sponsors need to be mindful of what they’re saying when they find themselves lured by low fees.
It was never the fees.
It was always the value.