Saturday, March 08, 2008
While it’s been a relatively mild winter here (and it’s not over yet), it’s been cold enough—and our house old enough—that opening the various utility bills has been akin to a monthly exercise in economic roulette. Not that we don’t know what the rates are (though that doesn’t mean they’re reasonable, IMHO), and not that, with some effort, we couldn’t find the appropriate meters and, at least in theory, undertake the calculations that would allow us to know what we have to pay before that envelope arrives. Still, those fees (more accurately, fee rates) are disclosed, and in theory, I am able to monitor them.
The reality, of course, is something different. The placements that make it convenient for the entities that deliver fuel and power to my home make it somewhat less than convenient for me to get to them on a regular basis (particularly during the winter months). Not that it would matter in any event—when it comes to utility preferences, my choices as a homeowner are relatively limited. My only viable recourse—and one that I entertain at least briefly following the receipt of each month’s bill—is simply to consume less of what I am being charged for. Sweaters for everyone!
Retirement savings plan participants are not dissimilarly positioned, IMHO. In theory most—despite the angst of lawmakers—are already in possession of information that would allow them to figure out what they are paying for their retirement accounts, although not always in a place, or explained in a manner, that makes the task easy (1). Additionally, when it comes to retirement savings plans, most of us are “stuck” with the plan chosen by our employer.
It’s not quite a utility monopoly, of course—I don’t have to save for retirement, and I certainly am not limited to doing so within the confines of a workplace retirement plan (of course, I don’t have to heat my house, either, but you take my point). It is, of course, the only practical way to avail myself of the “free money” of the company match (if available), and for most, it’s a significantly more convenient option than setting up a payroll deduction for a savings account (particularly for those lacking the discipline to deposit money regularly). For most, then, if there is an issue with what they are being charged for those services (and many don’t have an issue because they don’t know how much they are paying), the only viable recourse is, like with my home utilities, to consume less of what they are being charged for.
That, of course, is the concern expressed by those defending the status quo on participant fee disclosure; that if we tell people how much they are paying, they will stop participating in these programs. That would be an unfortunate and, I think, unintended consequence, since by most measures, most folks already aren’t saving “enough.”
As a consumer, I’m not happy about the high cost of my utility bills. There are limits to how many layers one can put on, or how low you can set the thermostat at night and still be able to sleep. But seeing that cost every month does at least provide the opportunity to consider alternatives, including a greater involvement with the powers that oversee such matters. Similarly, seeing the cost of my retirement plan spelled out as a number separate and apart from the investment returns in which it is currently imbedded isn’t a panacea. Some may well decide that they don’t want to pay that much, or use that cost as a rationalization for not saving at all.
But it also might provide a reason for participants (and plan sponsors) to consider some more-cost-effective alternatives (such as index funds or lower-expense share classes), it might engender a more proactive dialogue about curtailing some of these unnecessary “bells and whistles” that add cost but little value to these programs—and it might even foster greater participant attention to these critical savings vehicles. But even if it doesn’t—and even if the disclosure costs participation in the short-term—no one is well-served by a system that people think is “free.”
We don’t know how participants will react if those disclosures were more explicit(2). But every time I hear someone caution against doing so, one of two thoughts comes to mind: first, that they haven’t got a clue how little attention participants actually pay to these accounts and the accompanying disclosures; and second, that “they” have something to hide.
- Nevin E. Adams, JD
(1)Ironically, most of the regulatory focus to date has been on the types of accounts where prospectus disclosures are available, but almost none on the part of the industry reliant on annuity investments, where, by most accounts, fees are higher and disclosures nearly non-existent – but that’s a topic for another column.
(2)Anecdotally, there are a growing number of programs out there that offer that level of fee disclosure – and I have never heard that it has actually created an issue with participation rate declines of any real consequence.