Saturday, August 09, 2008

What Will Participants Do?

At the moment, the industry is scrambling to respond to the DoL’s call for comments on the proposed participant fee disclosure regulations by September 8 (see "Know Way".

I think, based on the conversations I have had to date, that most of those comments will be positive on the scope of the disclosures, and fretful about the timeframe for implementation. Most seem to think that the DoL’s measured approach will be matched by a (more) reasonable timeframe for implementation that that contained in the proposal. Of course, there’s pressure from other sides - Congressman George Miller, who has not only held hearings on the subject, but introduced legislation regarding fee disclosures, is grumbling that the DoL’s version doesn’t go far enough. He’ll no doubt be joined by the voices of unbundled solutions who may well feel that they are disadvantaged by the current proposal’s terms.

The ‘debate” over participant fee disclosure has generally focused on one of two concerns – the physical impossibility (or at least impracticality) of doing it – and concerns about what participants would do once they had that information. Those concerns have similarly run the gamut, everything from “we’d spend all this money for no reason” to worries that participants would be so shell-shocked by the size of those fees (or the realization that there WERE fees) that they would opt out of retirement plan savings altogether. The Department of Labor’s recent proposal on the subject will surely serve to mute the debate on whether we should disclose those fees, but what we don’t really know yet is – what will participants do?

How Much Ado?

The DoL clearly (and explicitly) expects that participants will make better investment decisions. In fact, it’s made some effort to quantify the financial impact of those decisions as part of its proposal (see IMHO: No One (Else) to Blame). However, no one – apparently not even the DoL – actually expects that all participants will pay attention (in its estimation of the impact of the regulations, the DoL projects that less than a third of participants will benefit from a time reduction in looking for the information – presumably the rest aren’t paying attention).

Most participants won’t be helped much by the disclosures, IMHO. That’s not a criticism of the effort – but let’s face it, we’re talking in large part about the kind of disclosure that has long been available through mutual fund prospectuses. Does anyone really believe that most participants will comprehend the fine print of those disclosures any better than they currently grasp that same kind of detail in their mutual fund prospectus? Seriously – look at the model comparative chart . I’m not saying this is rocket science, but even in the DoL’s proffered example, you have models of clarity like “$20 annual service fee assessed for accounts holding less than $10,000. May be waived in certain circumstances.” (All of which would make this “model” participant wonder – are we talking about my individual 401(k) account or the plan – my account in total, or my account holdings in that particular fund? And are MY circumstances “certain?”)

Some Improvements, But…

Now, there is the improvement in frequency and convenience of delivery of this information. But while there’s surely something to be said for that, it also has a downside - the sheer volume of materials we’ll now be producing to provide this information. While the DoL took some pains in its proposal to leverage existing mediums, they nonetheless estimated that the annual disclosure would represent an additional 13 pages of disclosure for non-404(c) compliant plans. Surely there has to be a better way!

Perhaps I’m being too harsh in my assessment of the mathematical acumen of participants, or their interest in pursuing the clarity the proposed regulations purport to offer. And, like it or not, those kind of fee structures, complexities and exceptions have long been standard in what passes for disclosure in the mutual fund industry. The specific disclosure of dollar amounts charged against participant accounts called for by the proposed regulations will be helpful information, IMHO – but that’s generally only a small part of the costs participants are bearing.

Where we are may, in fact, be where we need to begin, in terms of helping participants better understand and appreciate the significance of their retirement savings decisions.

But if we’re expecting a significant response to this kind, and this much, information on the part of participants – well, I wouldn’t hold my breath.

- Nevin E. Adams, JD

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