Fee disclosure regulations will be implemented for the first time for retirement plans on April 1, 2012. There are many people in the industry who have asked for my opinion and my guess on what will happen when they are finally implemented, but my guess is as good as guessing the winning ticket of next week’s Lottery drawing.
What I do know is that there are two main groups in the retirement that have very little or no knowledge as to what fee disclosure means. First are the plan sponsors, second are the plan providers. While many plan providers are ready for fee disclosure since they have been practicing full fee disclosure for years, others have been waiting until the very last minute.
As for plan sponsors, I believe that outside of the largest companies, very few small and medium sized plans understand what fee disclosure means and how their role as a plan fiduciary has expanded because they will have to be more vigilant in determining whether the fees they are paying are reasonable or not.
As for those who are against the whole notion of fee disclosure, get over it. I remember when all these fast food chains protested in New York City when there were plans to require these restaurants to put their calorie count on their menus. I do not believe that any calorie information has hurt any of these businesses because information and knowledge are business neutral, it is what the person who now possesses that information will do with it that is not. So a plan sponsor who puts the fee disclosure forms or new provider contracts in the drawer isn’t going to bother with whether their plan expenses are reasonable or not. A plan sponsor who fulfills their role as a plan fiduciary by shopping around to determine whether their fees pay are reasonable, are a threat to only those providers that may unreasonable fees.
While there is this mentality that fee disclosure will simply create a race to the bottom to find the lowest fees, I still don’t buy that. The reason I don’t buy that is that many low cost providers aren’t very good whether it comes to day to day plan administration. The other reason is that again I don’t see most plan sponsors doing the due diligence in finding what the cost of plan services are in the marketplace. The third reason is I don’t see plan services as being a service where price is the most important consideration. While I often fault plan providers in not stressing their value as plan providers, I don’t believe that someone who wants to be the Wal-Mart of plan services will do very well because I don’t see it as a business where price has been the overall consideration. It never has been and I don’t think it ever will. Like other professional service like law, medicine, and accounting, advertising that you have the lowest fees isn’t going to be the best selling point. At least that is my opinion.
So what do I see in the marketplace as a result of fee disclosure? I think there is a need for plan providers to stress their services and the reasonableness of fees. If you provide a quality service, it is less likely plan sponsor will leave you for $5 less. I also sense that there will be an upswing in lawsuits against plan sponsors for unreasonable fees since fee disclosure will reveal a plan’s true costs structure and end the myth of free 401(k) administration. Again if plan sponsors simply take the fee disclosure form and put in the drawer, that will increase their potential liability as a plan sponsors because what plan sponsors don’t know will hurt them.
Pingback: The Future after Fee Disclosure and the Crystal Ball |