By Tom Dennis and Cecilia Shiner, LIMRA Secure Retirement Institute
Fee disclosure regulations brought changes to the retirement industry, but are they providing the desired results?
In 2012, the Department of Labor issued final regulations requiring the disclosure of fee and expense information to defined contribution plan participants and sponsors. The intent was to provide greater transparency and awareness to the costs of providing and participating in an employer-sponsored retirement plan. Across the retirement industry there is consensus that fee disclosure is important and government regulation was the most effective means of delivering widespread transparency. So where are we a year later?
Since July 2012, the LIMRA Secure Retirement Institute has conducted a series of consumer surveys asking DC plan participants about their retirement plan fees. Our 2012 survey, conducted prior to the initial participant disclosure, showed that 50 percent of retirement plan participants do not know how much they pay in fees and expenses. One year later, a follow-up survey tells the same story. The disclosures have had little impact as there is no noticeable difference in participant knowledge of the fees they pay. Our 2013 findings show that half of participants do not currently know how much they pay in fees and expenses. Further, nearly 4 in 10 still believe that they do not pay any fees or expenses.
These findings do not diminish the fact that the fee disclosure requirements are good for an industry that historically lacked transparency. What the results tell us is that the disclosures must be accompanied by education and guidance. When asked about how much they pay in fees, only 12 percent of DC plan participants were able to estimate a percentage. Further demonstrating the minimal impact fee disclosures are having, one third of these participants believe they pay over 10 percent in total plan fees.
Previous Secure Retirement Institute research found that one in five consumers contributing to DC plans or IRAs say they rarely or never read retirement plan disclosures. In fact, only 1 in 3 spends more than 5 minutes reading disclosures. This is not at result of inadequate disclosure but more a function of participants using fee information only when making investment changes or examining statements beyond a quick account balance check.
Despite confusion around fees, the industry has made considerable information available to participants for use in making investment and account management decisions. One year removed from the original disclosures, 64 percent of plan participants feel that the fees and expenses they pay are reasonable.
In reality, it will take time for the long-term impacts of fee disclosure regulations to emerge. Retirement plan service providers are making the effort, but participant inertia and industry complexities are making it difficult to initially see positive results.
So can the retirement industry continue to educate participants on how to save and what it costs to save? The foundation is now in place and the industry must help participants understand the role and value of their retirement plan benefit, including the fees they pay.