When fee disclosure regulations came into being by the Department of Labor (DOL) in 2012, so many detractors of it said it would cause plan sponsors to terminate their plans and there would be a race to zero in fees. The truth shows that it isn’t the case.
A study by the National Bureau of Economic Research showed a benefit of fee disclosure that I never expected: the study found that participants became more attentive to fund fees and to short-term fund performance following the DOL’s regulation.
The study shows that participants became significantly more attentive to expense ratios and short-term performance after the implementation of the fee disclosure regulations. The study observes that index funds may benefit disproportionately from fee disclosure, as index funds tend to be among the cheapest options in many plans. Part of the heightened fee sensitivity in the study’s baseline results may be a result of investors switching from more expensive active funds toward cheaper index funds.