A Bunch of Cliches About Scary Things (Or a Few Words on Why Fee Disclosure Isn't Scary)
Here’s a very nice piece on fee disclosure, as mandated by the Department of Labor, and the idea that it is to everyone’s benefit. I have long maintained that fee disclosure of the type at issue falls squarely in the ballpark of the old saying that sunshine is the best disinfectant, and that running from fee disclosure – whether as a plan sponsor or a service provider – is the intellectual equivalent of running from the bogeyman; there is, in fact, nothing to fear from it, for well-run plans and above-board advisors, and for those who aren’t yet those but aspire to be.
Why is that? Well, let’s run through the list of players in the 401(k) rubric. Plan participants obviously benefit from knowing what their funds costs, and from the opportunity to use that information to demand proper attention to fees from their plan’s sponsors, administrators and fiduciaries. Where is the downside to them? I can’t see one. And then there are plan fiduciaries. Plan fiduciaries should be avoiding fees that are higher than needed, both to protect themselves from fiduciary liability and to best serve participants. Now this doesn’t mean they are required to, and nothing in fee disclosure or the law governing fees requires them to, chase the lowest possible cost investment options. What it does mean, though, and which cases like Tibble make clear, is that they have to investigate and follow a prudent process directed at using the right investment option at the right price. The more information they have, the better they are able to do this; likewise, the more they are pressed by participants to do this, the more likely they are to install a good process to review these aspects of their plans and, correspondingly, the less likely they are to fall below their fiduciary duties in this regard. This all make them less likely to be sued for, or found liable for, excessive fee claims, and thus protects them from financial risk in running the plan. These outcomes flow naturally from the public disclosure of the fees inherent in a plan. And finally there are the investment advisors and other service providers. More than one such provider has told me that they already make this information available or have changed their business models to build around the open disclosure of this information, and that they believe their ability to compete both on transparency of and attention to controlling expenses is a competitive advantage for them. I have long believed that transparency works to the business advantage of the best players in this area, and aren’t those the ones who should be winning business? Just another side benefit of fee disclosure, and one more reason why, when it comes to fee disclosure, there is, to quote a former president who knew a thing or two about creating a retirement plan, nothing to fear but fear itself.