Columnist: 401(k) Fees Still Hard to Spot

St. Louis Post-Dispatch, March 17, 2014

In theory, disclosing more information about fees was supposed to make 401(k) plans better.

Two years after it imposed sweeping new disclosure rules, though, the Labor Department isn’t sure whether they’re working. Disclosure is helpful only if it is read and understood, and 401(k) documents can be extremely dense.

“Some employers, particularly small businesses, may be having a hard time locating the required fee disclosures when they are embedded in lengthy or complex documents,” Assistant Labor Secretary Phyllis Borzi said last week.

The department proposes adding a roadmap feature, a sort of document on how to read the document. Employers would be told in plain language that they could find investment costs on page 17, recordkeeping fees on page 23, and so on.

Debra Moran, director of Acropolis Retirement Plan Solutions in Chesterfield, believes the roadmap is needed. “I can’t tell you how many (employers) still have no idea what they are paying,” she said. “It’s not being provided in an easy-to-read format that breaks fees down transparently.”

If employers don’t understand all of a plan’s fees, they’re probably not negotiating the best deal, and the cost to employees can be huge. For a 25-year-old worker who puts $5,000 a year into a 401(k) over a 40-year career, the difference between 1 percent and 2 percent in fees amounts to nearly $225,000.

Moran says that Acropolis clients have always received clear fee disclosures, but that companies she visits on sales calls often don’t know if their 401(k) costs are high or low. “Even companies that have 600 to 1,000 employees are struggling with this,” she says. “It shouldn’t be that complicated.”

Ah, but it is. When the Labor Department was writing the current rules, some big 401(k) providers lobbied against a requirement for simple, standard fee disclosure. They have to provide the information, but they don’t have to make it easy to find.

“There are some very simple ways to show people what their fees are, and the Department of Labor requirements don’t go far enough,” says Sean Duggan, a retirement plan consultant at Moneta Group.

The only justification for the current, confusing documentation, Duggan says, is that “someone doesn’t want someone to know what fees are. They want to hide it.”

He says disclosures to individual employees, which the new Labor Department proposal doesn’t address, also should be improved. The opacity of those documents may explain why, according to a survey by the Employee Benefit Research Institute, only 53 percent of 401(k) participants said they had seen a fee disclosure.

Still, both employees and employers have more information than they did before 2012. The new transparency — as imperfect as it is — seems to be driving down fees.

Brooks Herman, head of data and research at 401(k) information firm Brightscope, says average fees fell between 2009 and 2011, when the Labor Department was working on the disclosure rules. Based on a preliminary look at 2012 data, he says they probably also fell after the rules were issued.

“We’re better off than we were five years ago,” Herman said, “and I’m excited to see what round two of fee disclosure brings. I’m hopeful it will be another step in the right direction.”

It shouldn’t be the last step, however. Having embraced the concept of fee transparency, the Labor Department now needs to enforce the companion virtues of simplicity and readability.

David Nicklaus, the writer of this column, Mound City Money, is business columnist at the St. Louis Post-Dispatch.