The Uselessness Of Fee Disclosure

This past week, I received my 2010 end of year statement for my Vanguard rollover IRA and there was a nice surprise, they automatically switched my index mutual fund shares from their retail class to their institutional class, which has lower fees. Somehow my account hit a certain balance number to throw me into a lower fee class and it was very nice of Vanguard to do that automatically.

One of my pet peeves dealing with insurance company 401(k) platform is when certain third party administration (TPA) firms or the bundled provider themselves fail to notify 401(k) plan sponsors that their contract is up and there are less expensive alternatives out there from that very same platform.

Case in my point, my old TPA had a client on one of the more popular insurance platforms. I saw a copy of the contract that was signed in 1995 and expired in 2001 that stated that the charge to the client was 267 basis points. The only problem is that I had a copy of the contract in 2007 and the client was being charged that amount in 2007. My old employer and their broker (if he actually knew) never bothered to let the client know that 267 basis points for a daily plan with $3 million might have been a good value in 1995, but not in 2007.

That lack of a bump down in fees by my old TPA is a real problem that I have with fee disclosure that is coming to plans in July. Disclosing fees and compensation received is all well and good, but it has absolutely no value if the plan fiduciaries fail to exercise their fiduciary duty by comparing the fees they are being charged to what is offered in the retirement plan industry. A plan sponsor won’t know if 267 basis points is reasonable unless they shop their plan around on an annual basis.

Fee disclosure is great only if plan sponsors understand what it means.

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