August 30, 2012 is a first big day for the new era of disclosure covering millions of 401(k) investors.
That’s the day 401(k) plan sponsors must disclose their plan-level fees and expenses to employees who participate in the company’s 401(k) plan. These disclosures are part of the historic U.S. Department of Labor’s new 401(k) fee and expense disclosure rules, which have been years in the making.
While the August 30 deadline is important, the DOL’s new rules also call for individual participant fee disclosures. Those personalized expense statements will be distributed November 14, 2012 as part of the quarterly statements sent to plan participants.
So while the retirement industry debates the impact of fee disclosures, the consensus is that most individual investors will ignore these important numbers since they could be disguised as fund prospectuses or more junk mail.
This would be an expensive and tremendous mistake for millions of Americans.
As I point out in detail in my upcoming book, How 401(k) Fees Destroy Wealth and What Investors Can Do To Protect Themselves,” 401(k) plan participants pay out about $164 million in fees daily to the financial services industry. In terms of revenue sharing and 12b-1 fees alone, the amount paid annually is $9.5 billion.
These huge amounts have been paid out for decades to the financial services industry and 401(k) plan participants have no idea what they were paid or what they were getting in return.
It’s been a boondoggle for the mutual fund and insurance industries and a disaster for unsuspecting employees who assumed their employers were acting in their best interests. But when November 14, 2012 deadline is reached, this fee and expense information will begin to trickle into the hands of plan participants.
Depending on how well plan sponsors have been diligent in monitoring and advocating for lower fees or not will translate into better or worse employee relations. Or at least they should if plan participants take an interest in their own future retirement.
And that is where a new problem arises.
That problem centers on whether plan sponsors have a fiduciary duty to educate and correct any expense and fee payments which are outside the norm for their plan’s size. These new comparative measurement metrics will soon become available thanks to the DOL’s new regulations.
Of course, the answer is that plan sponsors do have a fiduciary obligation to act in the best interests of their employee’s 401(k) plan administration, so even if most participants neglect to respond to their individualized fee information, their employers cannot rely on inaction.
There are many ERISA lawsuits which testify that inaction is no defense against correcting the many problems which lurk in the 401(k) industry, including conflicts-of-interest, cozy relationships that impair fiduciary duties, lucrative revenue sharing deals, or just plain malfeasance.
Plan sponsors may get a temporary pass from their own employees since the new November 14 fee disclosures will just look like more line items in an accounting statement, according to Dan Weeks, COO and founder of Brightscope. That will be confusing to participants.
But when participants see how fees cost them hundreds of thousands of dollars in fees over their working lives that will change. For employees who have been too close with their plan administrators and investment providers, employees will now be able to see how those cozy relationships worked against them.
That realization would be bad enough at any time, but during the worst recession since the Great Depression, and also during a presidential election year, employees will see who is working for—and against—them.
The Disaster of Privatizing Social Security
The new DOL fee disclosure rules also deserve a national stage since the push to privatize Social Security is a blatant push by the financial service industry lobbying industry, the largest industry lobby in Washington, to generate fees and promote their existing sales-oriented businesses.
If Social Security is privatized it will convert participants into fee-generating workers, who assume all market risk, pay more for less, and end up with an indeterminate amount of money 30 to 40 years into the future. There is no upside to the privatization plan, yet this realization has not attracted enough national attention. It also explains why the financial services industry has spent millions trying to block the adoption of the fiduciary standard.
“How 401(k) Fees Destroy Wealth” Available in October 2012
The book, “How 401(k) Fees Destroy Wealth and What Investors Can Do to protect Themselves,” explains the impact of high fees on plan participants, how the financial services industry has benefited from revenue sharing and 12b-1 fees to work against their own customers. It also includes section on the record-level of wealth destruction caused by the housing collapse and how new fee disclosure rules impact target-date and multi-manager funds.
The book will be available in time October 2012 from Amazon. Watch this space for more details.