Something does not add up in a recent survey on the impact of the DOL mutual fund fee disclosure regulations on 401(k) plan participants.
According to a survey of 416 plan sponsors conducted by BMO Retirement Services, 80% of employers reported that the new DOL rules mandating full disclosure of retirement plan fees and expenses have had little or no impact on their plan participants.
“Plan sponsors believe the added regulations did not change participant behavior or their perception of their retirement savings benefit. Only 1% of plan sponsors participating in the survey reported seeing positive or negative changes in participant behavior.
“Similarly, just 1% of respondents felt an increase in ill will by participants toward either themselves or the plan’s recordkeeper,” according to a published report in Plan Sponsor.
The problem is that these surveys are aimed at the same people (plan sponsors) who necessitated the DOL to enact the new regulations in the first place. Unfortunately, many of these industry surveys ask the same people who are already clients to review their own performance. While I certainly have no idea how the survey was conducted, this is like asking restaurant owners to write a review of their own eatery. If this were to happen, most of the restaurant would get a 4-star rating. (It is also worth noting that this survey was not readily visible on BMO Retirement Services’ own web site, so it was not possible to see their methodology.)
The other problem with the survey results is that the same report also noted that over one-third (36%) of the plan sponsors surveyed believe that their Baby Boomer employees enrolled in their company retirement plans will work past the age of 65. The disconnect here is that if fees were reduced over the working careers of these employees, there is a good chance these same workers would not have to work past age 65 since their 401(k) accounts would be significantly larger.
Also, if these same plan sponsors were diligent enough to include lower-cost funds inside the 401(k)s, individual accounts would also be higher since funds with lower expense ratios have proven to be better performers. This could also allow plan participants to retire earlier.
It is also too soon to ascertain the impact of fee education since the regulations were passed in the spring 2012. After all, this was the first time plan participants were ever told what they were paying in fees, and survey found that most plan participants did not even know they were paying fees on their 401(k)s in the first place. So much for full disclosure.
More Than Fund Expenses
Certainly, lower fund expenses alone do not determine if an employee wants to work past age 65. Decreases in home equity, higher medical expenses, non-401(k) portfolio losses, the lack of real wage growth over the past decade, and simply the desire to be engaged all play large roles in deciding to work longer.
But the results of this survey certainly do not diminish the importance of reducing fees inside 401(k) plans. Every day, 401(k) participants pay $164 million in fees in the financial services industry, while revenue sharing and 12b-1 fees cost investors $9.5 billion annually. Academics and objective investment advisers, such as John Bogle and Bill Sharpe, have repeatedly found a direct correlation between a fund’s expenses and its long-term net performance.
Even worse, a fund’s trading costs are not included in a fund’s total expense ratio, and this expense can add an average of 1.44% to a fund’s aggregate costs, in addition to the average expense ratio of 1.19% for a U.S. stock fund, according to Kiplinger’s magazine (“Fewer Trades, More Gains,” James Glassman, Kiplinger’s Personal Finance, August 2013, p. 18.)
So it is unlikely that if 401(k) participants were educated about the negative impact of fees that they would voice opinions which are against their own financial interests. That is not part of being a rational investor.
My bet is that the survey only asked plan sponsors about the impact of fees on their own plans and participants, and being rational corporate managers, they did not want to voice any results which were antithetical to their own interests.
And therein lies the problem: Do plan sponsors want to objectively educate their own employees about the costs of their own 401(k) plans?
If they did, there would not have been a need for the new DOL fee disclosure regulations in the first place.