The fixation and discussion about plan expenses usually flares up when the stock market isn’t doing well. Two major corrections within a 10-year period (2000-2010) made fee disclosure regulations inevitable. With the way the market is going in 2014, we maybe headed toward another correction.
While the discussion about fees has had a positive effect on the retirement plan industry, it’s still not the greatest issue that has been left unresolved. While fees have gone down since the regulations have been implemented and plan sponsors have become cognizant of their need to pay only reasonable plan expenses, the biggest issue is still not talked about.
The issue? The fact that most participants in a participant directed 401(k) plan don’t have the requisite knowledge and background in order to make informed investment decisions. Too many 401(k) plans don’t offer plan participants enough investment education to make informed decisions and only a small amount of plans offer investment advice.
Giving plan participants the choice of investments to make and having an investment policy statement with a regular review of investment options is only half the battle to limit liability under ERISA §404(c).
Financial advisors along with plan sponsors need to make sure that plan participants have the right tools to make informed decisions. With apologies to my old law firm’s h.r. director, handing out a bunch of Moriningstar profiles isn’t going to do it. Plan participants at the very least, need some investment education that talks about the general rules of investing. The ideal approach is to make sure plan participants get investment advice, whether provided by the financial advisor (by abiding with the investment advice regulations) or provided by a third party (such as rj20.com).
While this industry had done a decent job with lowering and disclosing plan expenses, it needs to do more to make sure that plan participants get enough information to make informed investment decisions.