Most of us say "thanks" without thinking.
By Cyril Tuohy
More than a year after retirement account fee disclosures started appearing on retirement statements, investors seem unmoved by the industry’s equivalent of the “sunshine law.”
A leading expert says that there has been no boost in the number of investors paying attention to disclosure statements.
“Very few people changed their plan provider,” said George H. Walper Jr., president of the Lake Forest, Ill., consultancy Spectrem Group and author of a 2013 paper titled “Retirement Plan Fee Disclosure.”
The paper found that fewer than one in four investors has elected to change investments based on fees.
Fee disclosures started appearing in retirement account statements in the fall of 2012 to inform small investors how much money was going to pay for advisors, record-keepers and account managers.
Strong market returns in 2012 meant that investors see higher account balances only from one quarter to the next. Such increases tend to dampen the motivation to comb through fine print to see how much service providers and intermediaries are charging in fees.
New fee disclosures for individual plan accounts were passed by the U.S. Department of Labor in 2010, with the first fee listings showing up in statements in the fall of 2012. The Spectrem paper was based on a November 2012 survey of 324 retirement plan participants.
Critics of the defined contribution retirement system argued that better fee disclosure would only help investors. Fee critics also criticized the industry for downplaying the charges, burying them in a morass of fine print at the bottom of retirement plan brochures and prospectus material.
Over an investment lifetime, even small fees – a fraction of a percent – erode returns and cost investors tens or hundreds of thousands of dollars.
An example provided by the Department of Labor illustrates the ballooning effect of small percentages over long periods.
Assume a plan participant has 35 years until retirement and a current 401(k) account balance of $25,000 growing at 7 percent annually with no contributions. Fees and expenses of 0.5 percent trim the rate of return to 6.5 percent, and the account balance will grow to $227,000 at the end of 35 years.
Fees of 1.5 percent – triple the cost of the example above – will slash account balance growth to only $163,000. A 1 percentage point difference in fees and expenses would reduce the account balance at retirement by 28 percent, according to the Labor Department.
Who pockets the fees? Record-keepers, custodians, consultants, attorneys, accountants, financial advisors and brokers.
Looking back, nearly a year and a half removed from the first fee disclosure statements, fee disclosure rules “really didn’t have much of an impact, or it didn’t have the impact that many people thought it would,” Walper said in an interview with InsuranceNewsNet.
Some supporters of fee disclosure said investors would vote with their pocketbooks and move funds to cheaper alternatives. So far, though, that hasn’t panned out.
In 2012, the Standard & Poor 500 index rose 13.4 percent, respectable by any standard, although still well short of the 29.6 percent gain it posted in 2013.
Overall, 57 percent of survey participants said they took the time to read through fee information in their third-quarter 2012 plan statement, the survey found. Men are more likely than women to have looked at the fee information, the survey also found.
The higher the account balance, the more likely investors are to pay attention to fees, according to the survey.
The No. 1 reason for not reading fee information included with the statement was that respondents didn’t have time. A total of 43 percent said they didn’t have time.
The No. 2 reason for ignoring fee information: investors already had a good idea of what they were being changed. A total of 27 percent of respondents said they knew what fees they were paying, the survey found.
Only one in five – 21 percent – of those who read through the fee information made any changes to their investments, the survey also found.
The survey results signal that most retirement plan participants who read through the fee information were satisfied with their investment choices, according to the report.
When asked what kind of changes plan participants made to their investments because of the fees they were changed, only one-third said they moved their investments into lower-cost funds, the survey also found.
Walper said the survey showed that fee disclosure information is being read by plan participants, and that investors find fee disclosure important.
Overall, 88 percent of those who read through the information, as well as 66 percent of those who did not, agreed that making the fee information available was important.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at email@example.com.
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