If you're a citizen of this planet, and whether you have assets in a defined-contribution (DC) retirement plan or not, you simply must spend 25 minutes watching Bloomberg's recent report on the extent and effect of hidden expenses in 401(k), 403(b) and 457 plans.
The report is a powerful indictment of the status quo, even as it misses a few points that we think are central to the ongoing argument about what plan participants should pay (and pay for). Here, we'll just point to a few items that we thought were especially apt:
- Bloomberg's Mike Schneider notes early in the feature that a 2007 AARP survey indicated that 8 of 10 respondents said they didn't understand the expenses they paid in their DC plans. We'd hazard a guess that, due to implicit costs (some of which were illuminated by the Bloomberg report), the other 2 of 10 respondents don't know what they're paying either.
- John Hancock, Fidelity, and Nationwide refused to allow their spokespersons to appear on Bloomberg's air. Disappointing. Not surprising, but disappointing. The delicate dances their flacks would have had to do would make good teevee.
- As ever, costs are three-fold: explicit, implicit, and behavioral. We're all for exposing service providers' cynical skimming operations, but we'd like to see more attention paid to the often-disastrous effects of participant decision-making.
- The following statement from the National Education Association is an embarrassment to educators everywhere: "It's hard to deliver a program like this with a low fee because there are commissions paid to agents." No, it's not hard at all. And it's pathetic to suggest otherwise. A good first step would be to eliminate variable annuities from DC plans--or at the very least de-emphasize them in favor of less expensive, more appropriate investment vehicles.
- Greg Kasten notes that revenue-sharing payments are "sort of a pay to play type of arrangement." No doubt! As he says in the story: "The mutual fund has to make a payment to the insurance company, or the insurance company won't recommend the mutual fund." Here's another easy step: Pay for services on a fee-only basis, with no kickbacks or hidden deals whatsoever. That's the only way to ensure that fund selection and replacement are done on the merits.
- This was news to us, and we're not entirely sure what to make of it without a little more context, but Wal-Mart's apparent agreement with Merrill Lynch to not disclose the fee report for the Wal-Mart 401(k) is almost unbelievable. We say "almost" instead of "absolutely" because we've seen too much to disbelieve anything.
We'll be back with more on this topic soon. For now, we give big props to Bloomberg for airing this story. We hope the media stay on this beat. There's still more for reporters, editors, and producers to learn, and thus more for them to teach sponsors and participants alike about this enormously important topic.
We invite you to check out a few of our many discussions of issues related to DC retirement plans.
Mike Schneider, "The Truth Behind Hidden Fees in 401(k) Plans," Bloomberg Television, June 19, 2008