Saturday, March 10, 2007

Price Check


The good news is, Congress is beginning to take a hard look at 401(k) fees.

Unfortunately, that also happens to be the bad news.

They have a lot of company, of course. The Department of Labor has several initiatives currently under way, the Government Accountability Office (GAO) has called for more transparency, and a number of lawsuits have been filed alleging all sorts of fiduciary malfeasance on the subject (a complaint filed against Cigna last week seemed to suggest that having investment management fees netted against the returns in a mutual fund was some kind of conspiracy - see CIGNA Latest Target of 401(k) Fee Suit). In view of all that activity, last week’s hearing before the House Education and Labor Committee was relatively sanguine (see Congressional Committee Hears 401(k) Fee Disclosure Testimony).

Not that there weren’t points of contention (but not as many as one might have thought)—and even a couple of moments of tension between those offering testimony. All in all, those seemed to be rare, however—after all, we appear to be at a period where everyone agrees that we need to provide participants and plan sponsors with better information about the fees assessed against their retirement plan balances.

Comparison Points

Speaking on behalf of the American Benefits Council last week, Robert Chambers presented an intriguing analogy, noting that an automaker like Toyota no longer made cars—they assembled them, outsourcing the preparation of the various components. He made the point that consumers don’t know—or particularly care—what Toyota paid the individual subcontractors, they’re buying the total product. While it was a compelling image of how today’s 401(k) is put together, the analogy falls apart in two key aspects, IMHO. First, most of us buy our own vehicles, and not from a menu selected by our employer. Second, when I go to buy a car, I may not know (or care) how much the manufacturer paid its subcontractors—but I surely know how much I am expected to pay for that car.

Over the past thirty years, participants, and to a lesser extent, plan sponsors, have been lulled into a false sense of security about the fees they pay for these accounts. I don’t know how many actually believe these accounts are free, but I would imagine that a significant number of participants would be amazed at how much they are paying each year (that doesn’t mean those fees are necessarily unreasonable, by the way).

"Under" Currents

You can hear that same concern just below the surface of comments made by the defenders of the status quo—in between phrases about how “fragile” our current system is, and expressions of concern that participants might be so put-off by those revelations that they will eschew participation altogether. It’s not that I don’t understand what they are trying to say, but I wonder sometimes if they have any idea how that line of reasoning sounds. The implication is clear, even to those who aren’t yet convinced there is a problem: If people actually knew how much they were being charged….

The devil, of course, lies in the details—and concerns about how that information will be constructed and shared (and, trust me, it will be shared) were also just below the surface during the hearing last week. The concerns are twofold; that the mandated structure will be prohibitively difficult or costly to produce, or that the complexity of the information and/or the mandate will render a meaningful disclosure impossible (think prospectus). Indeed, IMHO, the scariest aspect of last week’s hearing was that Congress might feel compelled to roll up its sleeves and “help.”

I’m not altogether sure that the industry can be trusted to heal itself, but I do believe that a growing number are confident enough in the value provided—and their ability to explain it—to do the right thing, to place a visible price tag on those services. After all, if you don’t know how much you’re paying—it’s hard to appreciate how much it’s worth!

- Nevin E. Adams

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