|Mary Beth Franklin|
Depending on to whom you talk, the new rules requiring 401(k) fee disclosure will be either a watershed moment for the financial services industry or a non-event.
After more than four years of deliberation, public comments and delays, the
For many participants — and even some plan sponsors — seeing the laundry list of investment management, administrative and advisory fees, and prices may come as a shock. Last year, an
The question is: What will they do with this new information? And how will financial advisers respond to the questions that will be triggered?
"I believe this is a good thing," said
"People will finally understand that there is no free lunch," said
But he thinks that the majority of participants, already inundated with plan information, are likely to ignore the added disclosure — much the way that many Americans seem to disregard nutritional labeling in an era of epidemic obesity.
Fee disclosure can be meaningless without context,
"I can have a large account balance without much trading activity in a plan that has a low-fee structure, and the proportional dollar amount of what I'm paying as part of the 401(k) plan will be very high,"
"Conversely, if I have a low account balance, even in a plan with a high expense ratio, the fees may not look like much," he said.
Other advisers, such as
"In today's low-interest-rate, low-expected-return environment, costs become even more important,"
For example, assume that two investors each start with an account valued at
The first investor pays
Assuming a 7.74% compounding annual rate of return, the first investor will reach the goal of
By simply reducing advisory fees, the first investor is able to retire more than three years earlier than the second investor.
"I believe these cumbersome new rules will serve only as an additional barrier to new providers in a marketplace that is dominated by a small number of large players," he said, noting that the free educational lunches and promotional materials that they offer strongly influence some retirement plan advisers' recommendations.
Copyright 2012 Crain Communications Inc. All Rights Reserved.
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