Participants Still Lack Understanding of Fee Disclosures

Years after the DOL required fee disclosures be made to retirement plan participants, participant awareness continues to lack, but improvements may be coming.

By Amanda Umpierrez | May 05, 2017
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The mandatory fee disclosures under 408(b)(2) and 404(a)(5) aimed to provide both plan sponsors and participants with transparency and communication regarding investment fees; services; compensation; and more.

But while the disclosures attempted to create a clarity among providers, plan sponsors and participants, it was met with confusion instead. When the Department of Labor (DOL) fee guide proposal issued for plan sponsors in 2014 called for shorter summaries to omit lengthy, 408(b)(2) rules, no simplified guide was issued for participants. If a plan sponsor found trouble scanning through lists brimming with services and fees, how did—and do—the participants react?

“I suspect that some plan participants use it as best as they can, and probably a lot [of participants] throw it away,” says Aron Szapiro, director of policy research at Morningstar. “Or they don’t look at it until there’s some decision point, and then they need a little extra help to contextualize it.” The issuance of the first fee disclosures to participants got less attention than anticipated.

While 2012 reports emphasized education and better communication between employers and workers to improve participant understanding of fees, a conversation with then Assistant Secretary of Labor Phyllis Borzi, with the DOL’s Employee Benefit Security Administration (EBSA), revealed service providers are not following the rule to the letter. According to Borzi, the agency did not intend for providers to offer a master list of services and fees and have plan sponsors figure out which services they are using and paying for. Also, she said, it doesn’t serve the purpose of the regulations if the plan sponsor doesn’t have to understand the fee information it is provided because providers take care of everything for 404(a)(5) participant fee disclosures.

Although education on fee disclosures may be essential at certain points, to Jim Sampson, director of retirement advisory services at Hilb Group Retirement Services, it’s identifying the overall value in a simplified manner—and focusing on that value instead of costs— that drives participants and investors to engage in their plans. Sampson urges plan sponsors and participants to focus on the real value associated with the plan.

“The sponsor decides where the money goes, who the service providers are, and the employee’s stuck with it for better or for worse,” he says. “The whole purpose of having this plan is so that employees can retire on time with enough money. There’s a whole bunch of ways to accomplish that, and fees are part of the puzzle, but it’s not the entire puzzle.”

Szapiro agrees. “They could provide educational material, but a lot of participants aren’t really going to make sense of this,” he says. “People want the simplicity of something that just sort of says, ‘yeah, this is good. This is also good. This is better,’ that can do a lot of that backend work for them.”

Sampson believes that while fee disclosures have benefited those aware of fee charges, not every participant has—or will—keep an eye of on these charges. “That’s what the plan’s fee disclosure has done, it’s opened the eyes to people who pay attention, he says. “Unfortunately, not everybody pays attention.”

NEXT: Proposed Actions and Tools to Help Participants