Sponsors, as well as insurance companies and banking organizations, take an absurd position when they decline to disclose in full to 401(k) plan participants the fees they have to pay.
At a one-day November hearing before the Department of Labor's Pension and Welfare Benefits Administration, some executives took odd positions on the issue. Among them:
*Lynn Dudley, vice president-retirement policy, the Association of Private Pension and Welfare Plans, a Washington-based trade group, said, disclosure of fees "would make plans more expensive to administer, but be of little practical use to participants."
*Michael P. Barry, managing director, Plan Advisory Services Group, Bankers Trust Co., New York, said, "While we indicated that we are not opposed to rules as to fee disclosure in principle . . . we are not persuaded that there is something broken that needs fixing." Concluding, he said, "We are open-minded (on fee disclosure) but are not, at this time, convinced."
*James E. Bayne, who is manager-benefits finance and investment, Exxon Corp., Irving, Texas, appeared as chairman of CIEBA, which is the Financial Executive Institute's Committee on Investment of Employee Benefit Assets. Testifying, he said the Labor Department "can encourage even more progress in disclosure and reduction of expenses by continuing to raise the public's awareness of these expenses. Prescriptive solutions and mandates should be avoided. Otherwise, the innovations and progress . . . in developing defined contribution plan investment options, services and communications . . . will either be stifled or curtailed."
As the use of 401(k)s grows, more and more employees are being asked to take the responsibility and risk for planning their retirement investments. Yet companies, by declining to disclose fees, fail to give employees commensurate tools to make adequate decisions. The fees employees pay for participating in 401(k) plans can have a huge impact on the ultimate return of their investments, reducing their earnings by thousands of dollars. Participants deserve to know the fees associated with their plans and the impact the fees can have on returns.
Big companies might have the clout and sophistication to negotiate low fee arrangements with 401(k) vendors; and companies such as Exxon might generously absorb virtually all of the cost of the plan for participants. But most companies don't pick up the fees. Many sponsors might not understand the impact of fees on investment returns over the long run.
Vanguard Group Inc., Malvern, Pa., alone among big mutual fund companies, sent a representative to testify. All mutual fund companies are required by the Securities and Exchange Commission to disclose fees, and Vanguard long has stood out from its peers in showing the costs high fees have on investment returns. In his testimony, F. William McNabb III, managing director, Institutional Investor Group of Vanguard, said the company favors full disclosure.
Innovations in 401(k) services some testifiers mentioned include pricing arrangements. In a 1995 commentary in Pensions & Investments, Stephen J. Butler, president, Pension Dynamics Corp., Lafayette, Calif., who also testified at the hearing, raised the issue of expense arrangements leading to "catastrophic opportunity costs."
No company should make a decision on purchasing from any supplier without knowledge of costs. Yet many sponsors expect 401(k) participants to invest without full disclosure. Sponsors risk the erosion of support for 401(k) plans when participants are kept in the dark about fees. Mandating disclosure isn't the answer now. But the Labor Department can emphasize fiduciaries ought to be more open on fees.
In testifying, Ms. Dudley warned that "misleading and frightening stories about administrative fees charged to 401(k) plans could undermine this popular benefit plan."
Well, you can't dispel any frightening stories by keeping people in the dark.