Thursday, August 4, 2016

Why Are Fees Our Only Focus?

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.