What would you do if you knew how much you were paying in fees to the retirement plan you use? Not the fees to the mutual funds you invest in. Those are, for the most part, your decision. Unless of course your 401(k) is not-so-good, stocked with mediocre funds or too many options. I’m talking about the fees the plan charges you to invest for your future.
A recent move by the Senate to drop their pursuit of 401(k) fee disclosure (according to Max Baucus D-Montana who felt as though the inclusion of fee disclosure needed more vetting) from the the recently passed the American Jobs and Closing Tax Loopholes Act (sponsored by Congressman George Miller, D-California) has caused something of stir. The question seems to boil down to this: If you knew how much your plan charged in administrative fees, a disclosure that currently is hidden for the most part from not only the plan participant (you) and surprisingly in many instances from the plan sponsor (your employer), would you continue to invest?
The question poses several ways to think about you and your employer. The assumption is that both of you are smart, know what you are doing and understand the mathematical consequences of a single percentage point over a long period of time. The next assumption is that once you do know this you will keep right on investing with the understanding that in doing so, it is better than doing nothing, which is what Sen. Baucus believes might happen. This would be the unintended consequence.
In the argument for full disclosure, Kathy Kristof writing for MarketWatch illustrated something she found out, almost by accident, when she began tracking her old 401(k) at a previous employer. Because she no longer was contributing (and had yet to roll it over) she set up a tracking on the underlying investments in her old plan via what she refers to as a third-party site. It was here that she found a difference in account balances.
Her third party tracking site was unable to emulate her former plan’s fees in large part because they didn’t know what they were. If that “site” had made an estimation, based on what is normally charged by the administrators of numerous plans, she may never have noticed that her old plan was forced to sell shares in order to pay for the costs of the plan. She was shocked. (I was more shocked that she not only disclosed this oversight but did so in her column “Devil in the Details”.)
Fees are widely acknowledged as a cost of doing business. And in many instances, these fees are not the same type that enrage so many when it comes to banks (keep enough money in that account) or insurance companies (foresight to know the future and not change your mind). The fees they charge seem arbitrary and penalizing in nature, suggesting that you should have been smart enough to the costs of these products. These sorts of penalties are not hidden and yet we still fall for them. Repeatedly.
But 401(k) fees are different. Unless you ask, dig deep into your statement or if you are an employer, ask what your fiduciary responsibility is and whether it is being met, they are mostly kept out of view. While you may not extend the cost of that overdraft fee thirty years into the future, you will in the case of retirement fees.
So who should the prudent expert be? ERISA outlines who it is and what the “prudent expert” duties of a plan fiduciary are. The plan fiduciary is your employer while the plan provider is the company that offers the investment options. So in this instance and the source of these sorts of complaints is: paying reasonable fees falls to the prudent expert while the provider is off the hook.
This also suggests that all players in the game trust the provider to not only offer the right products but to do so at a competitive costs. The nature of the 401(k) is complex. While it seems like such a simple procedure to invest in one of these plans on the surface, it is deeply nuanced and even more flawed. The simplicity (a sort of set-it-and-forget-it investment that is done pre-tax) is well known. What happens to that cash in the seconds after that is where it gets murky.
What you should do is even murkier. We could let Congress hash this out and deal with the consequences. Among which would be a lot of vanilla low cost choices. or worse, the recoil, as if in shock, of all investing with those baddies on Wall Street. We could make those choices without the help of Congress. We could sue our employer. We could delve into our statements, ask questions and be diligent in pursuit of the answers.
Or we could accept the fees for what they are. No choice is good and no choice is acceptable. Keep in mind, the employer is using the same plan as you and it is no surprise that the most misinformed group is the small business owner. Also keep in mind that while knowledge is power it is also frightening. Would we invest less in protest? Would we invest at all?
While the devil is in the details as Ms Kristof suggests, the details are often simply ignored in part because the alternate choice is not so appealing.
Until this is resolved, you can do two things: find out what you are paying and whether your employer is okay with this cost. Perhaps that will be enough to get them to begin asking questions and that might be just the right nudge to get the process moving. While you can’t shop for a new plan to use, your employer can. And that should be incentive enough to cause the provider to strike a deal – or at least a better one.
To read Ms. Kristof’s blog.
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