If I were to name one ongoing
issue that has absorbed more time and energy for retirement industry
regulators, and has been the paramount compliance concern for plan
administrators, it would have to be plan fees.
Investment fees, administrative fees, transaction fees, there has been a
concerted effort by regulatory agencies and policymakers to limit the negative
effects that fees can have on the account balances of retirement plan
participants. Disclosure regulations,
best interest regulations, benefit statement requirements, all in some manner
reflect fees and their perceived importance.
This fee-focused thinking has
also influenced the growth of a cottage industry for law firms that have seen
an opportunity to litigate. Their
presumptive stance seems to be that lower fees are always desirable. The Department of Labor has been highly
visible as an amicus curiae supporter of plaintiffs in fiduciary breach cases,
and law firms have no reason to expect the DOL to be anything but an ally in
such litigation.
Yet there are other important
factors besides fees alone that influence the account balances that workers will
take with them into retirement. Some are
partly or entirely within the control of the worker, yet they are not talked
about as they should be; if they’re
discussed at all. Tunnel-visioned preoccupation
with minimizing fees, rather than promoting more aggressive saving and improving
investing behavior or reducing “leakage”, can lead to retirement accounts that under-perform
in the long run.
A presentation by Tom Kmak, from
the firm Fiduciary Benchmarks, at a
recent conference really caught my attention.
It was entitled Stopping the Race
to the Bottom and caught my attention with thought-provoking points about
the numerous factors that can influence retirement savings accumulations. It’s their conclusion that fees are well down
the list of most important factors. This
is somewhat ironic since Tom Kmak’s firm is the leading fee benchmarking
service in the industry. Tom’s
presentation basically lays out the argument that the DOL in many ways,
including their own booklet on 401(k) Fees, notes that fees should not be
considered in a vacuum. Tom then uses
mathematical examples to show why the DOL stance is in fact the moral high
ground. Or as Tom would say: “Fees
without Value is like knowing ½ the score of a football game.”
In any event, I believe the
suggestions they make for boosting retirement accumulations are worth pointing
out. This kind of information should be
in every employee enrollment meeting, in participant investment education, and stressed
at every reasonable opportunity when a plan and a participant interact.
Some may not be enthusiastic
about the recommendations found in Stopping
the Race to the Bottom. Some require
decision making and resolve on the part of a worker saving for retirement. Admittedly, not all of the recommendations
may be within reach of everyone attempting to save for retirement. But many participants can implement at least some
of the suggested steps, rather than relying on regulators to deliver a secure retirement.
The first suggestion was to
retire at the Social Security full retirement age, which for many is age 67,
rather than claiming a reduced Social Security benefit when first eligible at
62. Health problems may prevent some
from doing this. But those able to wait
to retire can put away a portion of full-employment earnings for four or five
more years, and will also have a higher monthly Social Security check when these
benefits begin.
Second, starting to save
specifically for retirement at an earlier age, and not depleting those
accumulations for other purposes, will take greater advantage of the power of
compounding and the time value of money.
Increasing one’s deferral rate is similarly advised. Both of these suggestions may be met with
laments of “I have other important priorities” or “I won’t have enough
disposable income.” For some it may be
true. For others such objections favor
short-term gratification, and are an excuse for ignoring retirement’s
inevitability because it seems far away.
Increasing the rate of return on
investments may seem an unlikely thing to propose. How can a retirement saver do that? He or she probably can’t do so on a short-term,
basis. But a retirement saver may never gain control over
investment performance if they don’t educate themselves in investing principles,
and – being so equipped – begin to make sound investment decisions. This is where investment fees should be
considered, but they must be judiciously weighed against investment growth
potential. Sometimes the latter is more
important than the former. And this is
where the importance of working with a good investment advisor proves itself.
One factor that is clearly beyond
participant control is an increase in employer matching contributions. This factor was a “wish list” item that
Fiduciary Benchmarks included among those factors which – over time – would contribute
to greater retirement readiness.
Having identified these factors
that could boost retirement saving accumulations, Fiduciary Benchmarks ranked
them top to bottom according to what it believes is their potential to influence
assets at retirement. An assumption was made
that each measure could be improved by 20%. For example, increase deferrals by 20%, lower fees
by 20%, and so on. Based on these
assumptions, Fiduciary Benchmarks ranked the factors in importance as follows:
1. Retire
later
2. Begin
contributing sooner
3. Increase
investment rate-of-return
4. Increase
rate of deferrals
5. Increase
employer matching contributions
6. Decrease
investment fees
Like any proposal to enhance
retirement readiness, the ideas offered in Stopping
the Race to the Bottom are not a
magic bullet. Variables can differ
greatly from participant to participant and plan to plan. Conditions change over time, and with stages
of life. But the big take-away here is
that most of us have choices we can make to enhance that readiness. No regulatory action by itself is going to
make it happen.
