The Math of Least Resistance

By Jeb Graham CEBS, CIMA® of CapTrust Financial Advisors, an independent consulting/advisory practice focused on the institutional retirement plan market, serving corporate, closely held, non-profit and governmental organizations. You may contact Jeb at 813.218.5008 or jeb.graham@captrustadv.com.

Inside the DC beltway, there are several proposals currently being debated that would increase the level of 401k fee disclosure to plan participants. Without any real understanding of the issue, it is easy to posit that more disclosure is always better. Who could be against greater disclosure? But in looking more closely at the factors involved and how more disclosure might benefit whom, there are more questions than answers. As is often the case in the legislative process, the hype may be greater than any real benefit…and the numbers may not add up in favor of the intended beneficiaries.

There is no question that more disclosure is warranted. I am a strong proponent of 401k fee disclosure and fully support legislative efforts to modify the Form 5500 attachments to more completely itemize expenses paid from the plan and the entities being paid from revenue sharing. More detailed information on expenses will be helpful to plan fiduciaries in making decisions related to investment oversight. Increases in meaningful disclosure will ultimately have a positive impact on participants. The key word here is meaningful.

That said, while I certainly applaud the intent, I seriously question whether increased disclosure to plan participants can be meaningful. It will simply be very difficult to provide disclosure that will be more helpful than harmful, to make things clearer rather than more confusing. It is easy to beat the legislative drum and spin sound bites like you know what you are talking about. Delivering on such promises is an entirely different matter.

Consider some facts. In today's environment, any participant wishing to do so can get complete disclosure as to the expenses on his or her 401k or 403(b) plan investments. As for understanding the information being disclosed, that too is fairly straightforward. Expenses are disclosed as a percent of the total account that is charged against the account on an annual basis. The real problem is in the interpretation of the information. Without having any base for comparison, the number means nothing.

As a professional experienced in working with both retirement plan committees and benefits managers that are the primary contact point for participants, I think my observations are representative of the real world. The honest truth is that most participants don't really care about the details of their 401k plan. Of course they care about results, but most lack the context for any details to be meaningful or to frame questions for which they should seek answers.

In my experience, about 80% of plan participants don't have enough understanding, or interest in understanding, of the details that would make any additional fee disclosure meaningful. As for the other 20% that do understand…they already know where to get the information they need, and further disclosure would not likely increase their knowledge base.

A point worth considering is the cost of the disclosure. If there are increased costs resulting from additional administrative and operation process to provide disclosure, you can bet they will be passed on to participants. Thus it is entirely possible that we could get more disclosure that is meaningless, AND increases costs.

How do participants benefit from disclosure? The real benefit to participants of disclosure, if they are fully engaged in their 401k or 403(b) and understand investments, is in helping them make appropriate asset allocation decisions. Another possible benefit could be the extent to which they might prod the committee to make positive changes to the investment menu. But at the end of the day, the participant has very little control over selection of investments...and the fact that investment selection is left to the plan fiduciaries is a good thing for most participants.

Some plans provide for an open mutual fund window that allows participants access to an investment platform offering virtually any mutual fund traded. The standard practice for this arrangement is that the participant pays an annual fee (usually less than $100) for this option. There is typically no cost to the employer for this feature, and the employer can potentially indemnify themselves of fiduciary liability.

The Real World. The bottom line is simply this. Improved disclosure to plan fiduciaries will have a meaningful impact on the investment oversight process, thus ultimately making a positive difference to participants. More disclosure at the participant level sounds good, but is not likely to help participants that don't take enough interest to read the disclosure available today. Increasing required disclosure is likely to increase costs to participants. Do the math…More disclosure = increased costs + no additional benefit to participants. In my view, that is a bad equation.

This material is distributed solely for information purposes and is not a solicitation of an offer to buy any security or instrument or to participate in any trading strategy. The views contained herein are the opinions of the author. It is not intended as legal or tax advice. CapTrust Advisors, LLC is a Registered Investment Advisor with the SEC. CapTrust is not a legal or tax advisor.

Other articles by Jeb Graham: Looking Under the Hood of Your 401k to Understand the Real Costs, Does Your Organization's Retirement Plan Measure Up? and The Importance of Legal Counsel Review.

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