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New companies are trying to fill the gaps in 401(k) fee disclosure regulations. Here’s why they all fall short.

Greg Carpenter

December 28, 2022


Want proof that the DOL’s fee disclosure regulations have not met expectations? There are a growing number of websites that claim to use technology to help sponsors or participants understand or uncover 401(k) fees. A classic case of the private sector correcting something government got wrong. Hail the “invisible hand!”

Not so fast. Unfortunately, none of them have got it right. Not yet anyway.

The problem is that definitive fee information is buried in the fine print (and footnotes!) of plan disclosure documents. Without access to the actual disclosure documents, the best any of these sites can do is make an educated guess regarding fees. Estimates, however well-reasoned, are not enough.

Failure of government regulations

In its 408(b)(2) regulation, the DOL required 401(k) service providers to disclose their fees to plan sponsors. Unfortunately, the DOL did not mandate a format for these disclosures. Providers were free to design their own disclosure documents, and many created lengthy and complex disclosures. While these documents may technically comply with the regulation, they don’t comport with the spirit of it. As a result, these documents are often difficult to impossible for the average small business 401(k) plan sponsor to understand. Attempting to compare disclosures across plans with different providers is even more difficult – even for industry professionals.

As written, the flawed 408(b)(2) regulations underserve their intended beneficiaries – plan fiduciaries and participants. Sponsors, with fee disclosure in hand, are unable to determine what they are paying – and to whom.

Participants get even less fee information under the DOL’s participant fee disclosure regulation. For many participants, they see only the expense ratio of the investment fund, regardless of how those fees are paid out indirectly to third parties. Sponsors and participants need help.

Private sector responses

To fill the gaps in the two DOL fee regulations, private company websites have begun to spring up to meet the underserved needs of sponsors and participants. I try to stay current with these new offerings. So far, no one has managed to pull the sword from the stone. Efforts range from potentially helpful in providing some basic information to downright misleading. All have significant shortcomings that anyone using the sites should be aware before making any decisions based on the information reported. Here are the problem areas:

Reliance on Form 5500 information. Form 5500 does contain some information on certain fees paid out by the plan, but these disclosures are not necessarily complete. As I have blogged previously, the reporting requirements are different for the 5500 than for DOL-mandated fee disclosures. In addition, small business 401(k) plans are generally not required to report these fee payments, rendering the analysis worthless. Simply put, there is just not enough relevant information on the Form 5500 to allow for meaningful fee analysis.

Statement data scrapes. I’ve seen some firms use information provided on quarterly participant benefit statement to estimate fees being paid. It seems logical, but as I stated above, the fee disclosures to individual participants include only direct payment deducted from participant accounts. Expense ratios of investments are not disclosed on the statements. These statement analyses do not include any of the indirect payments made by the fund manager to service providers – the primary source of “hidden” fees.”

Transactions analysis. This type of analysis is the most promising, but will require much refinement – and some meaningful changes to the DOL regulations – to be of significant value. In this approach, plan participants typically grant access to account transactions for a period of time. The company then crunches the numbers with some pre-set algorithms. Some claim to be able to categorize the types of fees paid, separating out the various fees for investment management, transactions costs, advisor fees, and recordkeeping. If accurate, this analysis can provide a good first step in understanding the fees being paid out, however, if access is only to participant data, it is limited to direct fees paid as described above.

For all of these methods, there is no attempt to match the value provided for the fee paid. While higher fees may point to waste, one needs to understand the value received in order to reach any conclusions. I have yet to see any site that provides accurate data and an analysis of value.

What to do then? Unfortunately there is no “Google-esque” solution to fee disclosures. For most of us, the best way to understand our plan fees is to speak directly to our providers and demand an accounting. Ironically, in 2014, the best way to understand fees in the highly technological American financial industry is to use a device invented in 1876.

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