Fees, Fees, and More Fees

Investment option fees are the current bête noire of 401(k) plans, but to date the government response to them has not been a direct attack on the amount of fees themselves, in the form of regulatory or legislative establishment of appropriate ranges of fees. This differs, for instance, from the manner in which the government has effectuated health care reform, where the new regulatory structure is built around establishing and dictating exact manners of compliance. In contrast, with 401(k) fees, the government response, as formulated through regulatory initiatives, is to increase transparency, as Ryan Alfred of BrightScope discusses in this insightful post, presumably in the belief that greater transparency will lead to greater pressure to reduce fees. At a minimum, one would expect broad knowledge of the fees that are part of different investment options to increase competition, as plan participants and fiduciaries seek lower fees for their own reasons when confronted with this information, and the providers respond to that pressure by competing more on price. That, in any event, would seem to be the theory.

Will it work? Probably, would be my guess, although obviously if we give it a little time, someone will be able to give us quantitative evidence at some point as to whether or not this approach succeeded in bringing down fees. But looking prospectively, rather than in hindsight, it only makes logical sense that it would. That relatively small subset of participants who understand the impact of fees on their 401(k) plans can be expected to press for lower fee options, and fiduciaries can in turn be expected to respond by seeking such options, if for no other reason than to reduce the risk of getting sued down the road by disgruntled participants; in this way, the self-interest of the key set of players on the buy side ought to reduce plan fees, as providers respond to this pressure by competing on price. Maybe that’s a little too “invisible hand of the market” for some people, and that may not be the answer to all problems everywhere, but it seems a nice logical outcome in this instance.

Moreover, it is likely to work here because the use of transparency to bring about lower fees is not occurring in a vacuum, but instead is reinforced by the private attorney general aspect of ERISA litigation, in which participant classes and individual participant plaintiffs simultaneously pressure fiduciaries to reduce fees or risk paying out a small fortune in defense costs and settlement money if they don’t, as this story about a recent settlement over fee disputes entered into by Bechtel reflects. Greater transparency combined with increased risks of liability for failing to act on fees seems like a pretty potent combination, and a sensible way to try to bring down fees without simultaneously hemming in fiduciaries and their vendors by dictating exact fee ranges.