It may seem to be a simple enough argument. Give someone something inexpensive and they will buy more. But will such a concept work in a 401(k) and will investors simply become so fixated on the price of the funds they chose as to overlook the actual product itself?
The Senate decided not to include the fee disclosure provision accepted by the House days ago for several reasons. There will be some disagreement into the why of such a decision, in part, because on the surface, its seems to be such a good one to include. But the truth be told, it would end up adding costs to the plan (an irony that isn’t lost on most of us) and might not even be used.
Fee disclosure doesn’t necessarily create an informed choice. Knowing how much a product costs doesn’t necessarily eliminate the products worth. In fact, we may have become so immune to this sort of information as to not regard it for it is.
At the heart of every plan is the mutual fund. Offer an employee the lowest cost option and they will probably take it. Whether or not it is the right choice depends on the investor. Whether or not the investor knows their needs is another question entirely. Whether fees have anything to do with the performance of the fund, the quality of the plan and the ability of the company to do anything about it did not play a role in the Senate’s decision. The mandate would end up adding costs.
Now we all know that costs can be brought down to some degree after the initial impact is incurred. We also know that if the plan sponsors, often the biggest mutual fund brands could reduce their costs and disclose their fees to the end-users, the pressure might force others to follow suit. Putnam recently has done just that. But they shouldn’t expect others to follow their lead, at least in the short-term.
The effort to get full fee disclosure is far from over and some industry analysts think that it is an inevitability, even if it is the result of competitive pressure. The question is: will you understand what you will be receiving in your statement if it does become law? And will enough of you care to push your plan sponsor to adopt the least expensive plan once you find out that company XYZ is paying a fraction less in their plan than yours?
While the retirement industry might think you can have an apple-to-apples comparison, that world is mostly illusory. Knowing what your 401(k) plan really costs is a good thing; knowing which mutual fund products make the most sense is much harder.
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