Investment fees have long been viewed as the black box of many 401(k) plans. Plan sponsors and participants have no easy way of knowing what how much they pay in fees. This is about to change with the new Department of Labor (DOL) regulations; and, with this change we may see a radical transformation of the 401(k) landscape.
The DOL intends to crack the black box by heightening fee disclosure requirements. No longer will plan administrators and investment managers be able to display account values after fees are deducted without first itemizing the fees. Nor will they be able to use “hidden” fees within mutual funds to cover certain costs, and lead plan sponsors and participants to believe the plan cost very little, if anything at all.
Under the new guidelines, mutual-fund firms and other 401(k) administrators will have to disclose fee details to employers. Employers will in turn have the fiduciary responsibility to disclose the costs to participants.
Participants will soon have access to information previously unknown or nearly impossible to discern. This knowledge is likely to prompt questions. Questions about value. Participants will likely ask whether better value would produce better returns—and indeed whether they have been getting the best returns.
You don’t need a crystal ball to predict the consequences of participant scrutiny. Here are some pretty safe bets as to the impact of Disclos-aggedon:
- downward pressure on plan fees and expenses
- efforts by providers to bring cost-saving measures to plan sponsors
- competitive advantage going to providers with low-cost solutions
- new and different pricing options being provided to plans and their participants
- increased use of “brokerage windows” to allow more choice and move expenses directly to the participant
- potential reductions in plan options, such as limitations on plan types and plan minimums, as well as new or revised plan minimums
- redefinition and quantification of advisor value and service proposition with a focused effort on participant outcomes
Disclos-aggedon is not about gloom and doom for participants. Quite the opposite is true. It will give investors the information they need so that they may do what they do best—seek value for service.