401(k) Fees and the Casino Count Room

One of my favorite movies is Casino. I admit it, I am a huge sucker for great mob movies and while it’s not the Godfather Trilogy or GoodFellas, it’s on the next level. One of the most interesting scenes is when it is acknowledged that the mafia owners of the Tangiers casino were not allowed in the count room, where the money from gambling is counted. It was a strange rule that as the owner of a commercial enterprise, you were not allowed in the room where your revenue is counted. Strange, but true.

Retirement plans until January 2012 have a similar rule. While retirement plan sponsors and fiduciaries have the fiduciary responsibility to know the true cost of the administration of their plan, plan providers are not legally responsible to tell plan sponsors that information. So what the plan sponsors and fiduciaries may not know, can hurt them. Plan fiduciaries such as plan sponsors and trustees also must determine whether the fees being paid are reasonable and that is impossible if they don’t know the actual fees.

I have been a big proponent of fee disclosure because I believe in the free flow of information and plan sponsors not only should know how much the administration of their plan costs, but they have that fiduciary obligation.  While I have been critical of excessive fees in the past (especially those charged by a former third party administration (TPA) firm employer of mine), I understand that the far majority of plan providers don’t gouge fees and a majority of these providers already disclose these fees before any regulation required them to so do. So if there is no illegality or fee gouging going on, why were so many people and companies resistant to fee disclosure? I am a big fan of a level playing field and I think all providers should play on one and all plan providers should be required to disclose fees, so plan fiduciaries can exercise their fiduciary responsibility in a prudent fashion.

Some critics of fee disclosure claim that all fee disclosure will do will drive plan sponsors to only seek the cheapest TPA firms and the cheapest financial advisors. That might be the case if all plan sponsors would actually read the financial disclosure and then actually shop the plan around to determine whether the fees are reasonable. In addition, will plan sponsors still always choose the cheapest plan providers? If people only sought the cheapest provider, we’d all be shopping at Walmart. In addition, TPA and financial services aren’t like a pair of Wrangler Jeans because many cheap providers in the retirement plan business make up the lack of cost with a lack of services.

As I have stated before, fee disclosure may bring or may not bring a multitude of changes. I can’t wait to see what will happen.