The Float

Open Letter to Retirement Plan Participants

The following doesn't reflect the entirety of our thinking, but it captures the essence of it. We're sending this to 401(k) participants in plans for which Interlake serves as investment advisor.

Dear Plan Participants --

 

As you know, these are very difficult times in global financial markets. A full explanation of the last several months would require more detail than I can fit into this short note, but I'd like to summarize a few key points and, by putting all of this into its larger context, encourage you to remain committed to your retirement program.

 

First, the basic problem is the contraction of credit markets in an economic system that’s deeply dependent on credit expansion. When banks can't or won't lend to each other, or to businesses and individuals, the system seizes up. That isn't a problem just for Wall Street; it's a problem for the entire global economy.

 

The good news is that policymakers are responding aggressively with a wide range of tools, some of which will help. This is not a replay of 1929. The bad news is that this process will take time to run its course. Until confidence and capital can be restored to the system, markets will remain volatile and asset prices will remain under pressure.

 

I can't tell you when the stock market will stop moving lower. I can't tell you when it will start moving higher. But I can tell you--and this is an enormously important point--that lots of very good long-term assets have been put on sale by people who, for various reasons--some technical, others psychological--have been forced to sell. You aren't forced to sell. In fact, you're able to continue accumulating assets at very desirable prices, and that's a supremely powerful position in times like these. 

 

This is a classic bear market, and it won't be the last one you'll see in your lifetime. Whatever uncertainty you may feel at the moment, it's my fiduciary duty to encourage you to continue deferring into your plan. Expected future returns on your current contributions are now substantially higher than they were just a few weeks ago. That may seem counterintuitive, but that's exactly why it's true. As others bail out and run for cover, you'll continue buying good assets at increasingly attractive prices.

 

I know these are stressful days. I feel it right along with you. But you have the luxury of taking the long view, and that view is now more attractive than it has been in years.

 

Regardless of short-term market conditions, your 401(k) plan retains its essential advantages: low expenses, true diversification, and solid portfolio discipline.

 

As always, you should feel free to get in touch if you have any questions at all.

 

Sincerely Yours,

Kevin

Not all of the above applies to all retirement plans, especially the points about low expenses, diversification, and discipline. But the letter's basic argument does indeed apply to participants in the accumulation phase of life.

 

As always, those at or near the end of the accumulation phase should not be over-exposed to risky assets in the first place. But that has more to do with an individual's existing corpus of assets, not their continuing contributions, which, if they have any risk acceptance at all, should be directed increasingly heavily toward equities, whose future expected returns are substantially higher now than they were just a few weeks ago. (On this topic, see John Hussman's latest.)

Perils of Retirement Plan Fund Selection

As the credit saga continues, we thought it might be helpful to change the subject for a bit here. As longtime readers know, we've spilled many pixels on the various topics concerning defined-contribution retirement plans. Given the big shift from defined-benefit pensions to defined-contribution 401(k), 403(b) and 457 plans, we simply must get these things right.

Unfortunately, a toxic combination of industry cynicism, sponsor inertia, and participant ignorance* has left us with a wildly sub-optimal system of saving and investing for retirement.

In the most recent issue of Wealth Manager, Larry Swedroe notes one of the big problems affecting many (we'd say most) plans. Swedroe's basic argument (we apologize, but no link is available) is that investors and plan sponsors chase the performance of active managers in decidedly unproductive ways. Using the iconic Bill Miller as an example of the effectively indistinguishable mix of skill and luck that defines every manager, Swedroe makes the following indispensable point:

Before we examine Miller's record since 2005, it is important to note that when the streak began, there was no way for investors to know that Miller would produce the returns he earned from 1991 through 2005.

Exactly right. But that doesn't stop plan sponsors and participants from acting as if they can identify next year's winning managers. And how do they attempt to do so? By consulting past performance numbers, often from the very recent past.

Here's Swedroe on a 2007 study of fund inclusion and exclusion (emphasis added in bold):

The authors found that funds that were added to plans had outperformed benchmarks for both one- and three-year periods prior to the change. They also found that funds that were dropped had underperformed benchmarks for both periods before they were dropped. The added funds outperformed those dropped by 2.8 percent per year for three years before the change and 2.3 percent in the year before the change. Unfortunately for investors, however, when a plan replaced a deleted fund with one of identical objectives, the deleted funds outperformed their replacements by 2.4 percent per year over the next three years.

This is reversion to the mean, pure and simple, the disregard of which is costing American workers untold numbers of dollars every year, let along over the long term, where poor fund selection, by sponsors and participants alike, impairs the compounding process in a truly vicious way.

Once again, we're back to the unholy trinity: the cynicism required to keep selling plans on the basis of funds per se, as if fiduciary duty were fulfilled by chasing hot managers; the inertia of sponsors who accept too many of the industry's marketing claims at face value; and the (almost inevitable) ignorance of participants who end up staring at inexplicable menus of funds that were assembled for all the wrong reasons. 

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* Members of Congress might not want to play the "blame game," but we do. And we assign blame for the retirement plan mess in the order listed here: industry, sponsors, participants. First, industry cynicism is inexcusable in an arena defined by the fiduciary standard of care. Second, sponsor inertia is understandable but not acceptable, because sponsors, too, are obligated to offer plans rooted in fiduciary principles and practices. Third, participant ignorance is entirely understandable, but still not helpful, as participants owe it to themselves and their beneficiaries to push for better benefits.

** Why, why, why does Reuters refer to it as a "fiscal" rescue plan in its headline? Diction, people! Thinking of the federal government's fiscal condition, aren't the leading alternatives more like the opposite of a rescue?

Sources

Larry Swedroe, "Yesterday's Masters of the Universe," Wealth Manager, October, 2008 (no link available at this time)

"Senate leaders vow passage of fiscal rescue plan**," Reuters, September 30, 2008

West Virginia Revisited

Back in late May, we posted an item on the story of almost 8 in 10 West Virginia teachers choosing to abandon their 401(k)-style defined contribution plan in favor of rejoining the state's defined-benefit pension system.

In Monday's Wall Street Journal, Jennifer Levitz added more detail to this fascinating case study. Here's part of her opening salvo:

[O]n July 1, after a vote authorized by the state legislature, 14,871 school employees, or 78%, switched to the old-fashioned pension plan.

After the vote, teachers were "jumping up and down and crying in the halls," [union president Judy] Hale says.

The school employees put their mistakes behind them, but their experience stands as a cautionary tale for employers and employees across the country. As large numbers of workers are starting to retire with 401(k) or 401(k)-like plans to support them, what happened in West Virginia is a window into exactly how things can fall apart for workers, and it serves as a wake-up call for figuring out how to avoid having plans go as badly off track as this one did.

As we wrote in May, this story is stuffed with themes applicable to the bigger picture in the American system: "underfunded pensions, employers' cost-conscious transition from DB to DC plans, expensive/under-performing insurance-focused products, poor decision-making by participants, and, as a consequence of all of that and more, grossly inadequate outcomes for rank-and-file participants." The Levitz piece is very much worth reading, but as usual, we ran across a couple of items worth quibbling over.

Here's one (emphasis added in bold):

Many workers with retirement accounts have built nest eggs far bigger than they ever imagined possible. But unknowledgeable ones often are far short of comfortable retirements -- and they don't have the option the West Virginia teachers did of appealing to state legislators to get them out of their investing mistakes.

Knowledge is important, and ignorance generally doesn't help plan participants achieve the best possible long-term outcomes. But it isn't just a matter of knowledge; it's also a matter of psychological and behavioral capacity to avoid making big mistakes. The problem for some participants is their sense that they have too much knowledge, and thus that they can outsmart the markets. The picture we see isn't the sophisticated elite among plan participants on one side and the clueless masses of rubes on the other. It's participants of widely varying "sophistication" encountering very much the same set of problems: excessively expensive, under-performing investment choices; emotional whipsaws; and inertia.

One of the dominant themes in the Levitz piece is the role of annuity-based products in the West Virginia defined-contribution plan. This is ugly stuff:

From the start, most employees favored the annuity. Some say they were swayed by [AIG unit]Valic's sales force, which included former educators and school employees who went into the schools during the workday to talk about the option. "These people came during your lunch or during your planning period basically to sell the program," says Debra Elmore, a third-grade teacher in Ansted, W.Va.

Ms. Elmore acknowledges knowing little about investing. "Oh, Lord no," she says. "I had no idea." She set up her account so that 85% of her contributions would go into the fixed-rate annuity. "I just thought, 'Well, these are safe. Let's stay there.' "

"Safe" being a decidedly relative term, apparently. Later in the story, Levitz notes that at one point, more than two-thirds(!) of plan assets were invested in a fixed-rate annuity. But wait. There's more:

AIG spokesman John Pluhowski says the insurance company hires former school employees to sell its products to schools "because the education market is important to us; educators know the needs and concerns of educators." He says the representatives were "not authorized or directed to give investment advice; they were only authorized to sell a fixed-annuity contract."

In other words, some former teachers know how to play to the fears--"concerns" is a classic Orwellian euphemism--of their former colleagues. Beyond that, here's Pluhowski uttering one of the industry's sorriest canards, that "selling" can be separated in any moral, ethical, or practical sense from the giving of "investment advice." Now, we're fully aware that that distinction has had the force of law for many years (in the distinction between brokers and agents who sell and investment advisors who advise). But let's leave the fine artificial regulatory distinctions aside for a moment, shall we? the fact of the matter is that some degree of investment advice is always and forever inseparable from selling. Does Mr. Pluhowski really think--do you think?--that his agents descended on Ms. Elmore and her colleagues and didn't utter a word of advice? "I think you should buy this because it's in your interests; just look at all these features and benefits." Isn't that a form of advice by definition? What's the alternative? "I want you to buy this because it's the only way my boss will pay me." That isn't advice, but it isn't plausible either. Not in this universe, anyway.

Later in the story, Mr. Pluhowski returns:

AIG denies wrongdoing. Mr. Pluhowski declined to specifically discuss the lawsuit or the current state investigation, but says, "We are confident we met the obligations we were contracted to provide." He declined to say how much employees were paid for sales of the annuities, but says that "no plan contributions were used to pay commissions." West Virginia's insurance commissioner investigated Valic's sales practices in 2002 and cleared the company, saying it had found no misrepresentations by Valic agents.

How many disingenuous arguments can one man make in a single Wall Street Journal story? We may be testing the limits here. "No plan contributions were used to pay commissions." Yes indeed. What that means is that when Ms. Elmore deferred $100 into her Valic annuity, she saw $100 appear on her statement. But...but, but, but...the super-generous commissions paid to AIG's sales force have to come from somewhere, right? And where would that be? From Ms. Elmore, of course, over time, as an implicit deduction from her potential returns. The consequence:

Ms. Elmore, 46, says she realized her disappointment in the defined-contribution plan when she received a letter from the state's retirement board in April projecting that, at age 60, she would have a big-enough nest egg to provide her with $1,571 per month for her life. By contrast, the letter projected, if she voted to go back to the defined-benefit plan, she would receive a projected monthly payment between $2,656 and as much as $3,050.

This form of deadweight loss, a consequence of near-monopoly power and consumer ignorance, is especially ugly because it's so enormously consequential and so easily avoidable. As ever, the moral burden is broadly shared: Plan sponsors, participants, and providers simply must do better.

Source

Jennifer Levitz, "When 401(k) Investing Goes Bad," Wall Street Journal, August 4, 2008

More Problems in Pensionland

For some time now, two related problems have characterized the private sector's defined-benefit pension system: The underfunding of company pension funds and the freezing or termination of defined-benefit plans altogether.*

In yesterday's Wall Street Journal, Ellen Schultz and Theo Francis drew attention to the unappealing corporate practice of shifting promises of pension benefits for highly-compensated employees' into the company's regular (i.e., tax-advantaged) pension plan. A couple caveats before we go to the excerpts. First, with the exception of Intel, the Journal's "sample" of companies that have engaged in this practice in one way or another isn't exactly a who's-who of corporate America. Second, as we've noted before, we aren't ERISA attorneys and don't even play them on this blog. We'll be asking a couple ERISA experts for their reaction to this story later today.

Here are the key passages from Schultz and Francis (emphasis added in bold):

At a time when scores of companies are freezing pensions for their workers, some are quietly converting their pension plans into resources to finance their executives' retirement benefits and pay.

In recent years, companies from Intel Corp. to CenturyTel Inc. collectively have moved hundreds of millions of dollars of obligations for executive benefits into rank-and-file pension plans. This lets companies capture tax breaks intended for pensions of regular workers and use them to pay for executives' supplemental benefits and compensation.

The practice has drawn scant notice. A close examination by The Wall Street Journal shows how it works and reveals that the maneuver, besides being a dubious use of tax law, risks harming regular workers. It can drain assets from pension plans and make them more likely to fail. Now, with the current bear market in stocks weakening many pension plans, this practice could put more in jeopardy.

How many is impossible to tell. Neither the Internal Revenue Service nor other agencies track this maneuver. Employers generally reveal little about it. Some benefits consultants have warned them not to, in order to forestall a backlash by regulators and lower-level workers.

That last sentence is where things get especially squirrelly. It's yet another reason we see such miserable numbers on things such as "consumer confidence" and responses to "right track/wrong track" questions about the direction of the country.

And taxpayers are on the hook in other ways. When deferred executive salaries and bonuses are part of a pension plan, they can be rolled over into an Individual Retirement Account -- another tax-advantaged vehicle.

This is a big part of the problem: Unintended (by Congress, that is) taxpayer subsidies of pension benefits for highly compensated personnel. There's more, like this exemplary fiduciary practice </snark>:

Generally, only the executives are aware this is being done. Benefits consultants have advised companies to keep quiet to avoid an employee backlash. In material prepared for employers, Robert Schmidt, a consulting actuary with Milliman Inc., said that to "minimize this problem" of employee relations, companies should draw up a memo describing the transfer of supplemental executive benefits to the pension plan and give it "only to employees who are eligible."

Meanwhile, the IRS doesn't have a particularly good handle on this practice:

With too little staffing to check the dozens of pages of actuaries' calculations, the IRS generally accepts the companies' assurances that their pension plans pass the discrimination tests, the official said.

"Under existing rules, there's little we can do anyway. If Congress doesn't like it, it can change the rules." To halt the practice, Congress would have to end the flexibility that companies now have in meeting the IRS nondiscrimination tests.

A spokesman for the IRS said it has no idea how many such pension amendments it has approved or how much money is involved.

Want to brew up a recipe for a serious populist backlash against the well-heeled? Keep doing stuff like this. We'll be back with more on this if we can pass along some expert views.

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* The public sector's pension system has generally been plagued by underfunding (which in some cases is also a function of over-committing), but, generally, groups of public sector employees have retained relatively generous pension arrangements. Many of those arrangements are now coming under immense pressure from the taxpaying public. We sense significant--if slow--change afoot in the public sector.

Source

Ellen E. Schultz and Teho Francis, "Companies Tap Pension Plans To Fund Executive Benefits," Wall Street Journal, August 4, 2008

Participants (and Others) Behaving Badly

Tuesday afternoon we posted an item on Bloomberg television's recent feature on hidden costs in defined-contribution retirement plans. In that short assessment, we noted that plan costs come in three flavors: explicit (mutual fund expense ratios, insurance charges, recordkeeping, administration, sales loads, advisory fees), implicit (mutual fund trading costs, impaired dividend reinvestment), and behavioral (participants managing their plan assets suboptimally in one way or another).

This is necessarily imprecise, but we think the amount of attention each category of costs receives is inversely related to the extent of its effects. High explicit costs are (relatively) easy to identify and, where fiduciaries want to do the right thing, easy to correct. High implicit costs are tougher to identify, but still reducible when there's sufficient interest in doing so. Behavioral costs are exceptionally difficult to quantify, in part because the current regime of individual accounts privileges rank-and-file participants' autonomy over plan-level management (and, therefore, effectiveness).

But again, it's the behavioral costs--the toughest to quantify and the least-understood--that often wreak the most destruction on participants' long-term outcomes. As we noted back in November, the best plans feature low expenses and high-quality decision-making (see adjacent table).

Which is why we were so pleased to see Financial Engines release the results of its study of participant behavior (available here after you enter some basic identifying information). The findings, as you might imagine, were not particularly encouraging. But as we've long argued, there's nothing wrong with the defined-contribution system that can't be fixed with a few good (i.e., painfully obvious) ideas and a healthy dose of fiduciary responsibility.

Writing at WebCPA.com, Stuart Kahan has a good, short summary of the Financial Engines report. We're going to dig into the report itself and post a more substantive evaluation (probably early next week), but we did want to make special note of one general conclusion Kahan mentions in his piece. Here are the key passages:

Participants earning the lowest salaries are the most likely to make investing mistakes. More than half (53 percent) of participants with annual salaries below $25,000 have portfolios with very inappropriate risk and/or diversification, compared to 33 percent of those earning more than $100,000 per year.

...

In terms of salary, 63 percent of those earning less than $25,000 per year fail to save enough to receive the full employer match, compared to 24 percent of those with salaries between $50,000 and $75,000, and 12 percent of those with salaries greater than $100,000 per year.

None of this is especially surprising. Lower-income workers may be less financially sophisticated, but they certainly have less access to sophisticated help.* The real problem here is that a system driven primarily by participants' elective reductions of their own present income will necessarily put lower-income workers at a significant disadvantage. So not only have plan sponsors and the financial services industry (by resorting to the false security of 404(c), among other mistakes) pushed responsibility for account management down to rank-and-file participants; the system has doubled down on the problem by placing low-income participants--those who need the most help and have the worst retirement security prospects--in an especially difficult position.

This is not a satisfactory state of affairs, but we (policymakers, sponsors, service providers, participants themselves) have the means to improve upon the decidedly imperfect status quo. And time is of the essence...

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* Let's not make too much of this sophistication argument; plenty of affluent, highly-educated participants make big mistakes too, in many cases as a result of overconfidence.

Sources

"Who Benefits from Today's 401(k)?" Financial Engines, June, 2008

Stuart Kahan, "How Well Are We Handling Our 401(k)s?" WebCPA, June 20, 2008

Bloomberg 401(k) Story

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.

Source

Mike Schneider, "The Truth Behind Hidden Fees in 401(k) Plans," Bloomberg Television, June 19, 2008

Major Bloomberg Story

Notwithstanding our best-laid plans, this week has turned into a blogging vacuum. Monday we're back at it--with feeling.

Next week we'll give significant attention to the major Bloomberg story on hidden expenses in defined-contribution retirement plans. This is big stuff, important stuff, and we'll give it the full treatment when we're back in the saddle.

For now, we encourage you to take a look at this short preview at 401khelpcenter.com, then watch the televised feature, which, at the moment, is mid-page at Bloomberg.com.

DB v. DC in WV

With our blogging vacation behind us, we have some catching up to do around here. One particularly interesting item that appeared over the last week is Janice Revell's story on the choice faced by public school teachers in West Virginia: Stay with the 401(k)-style defined contribution plan that replaced the schools' traditional pension system, or abandon the DC plan in favor of returning to a defined-benefit pension system.

We'd excerpt the story, but we'd end up passing along just about the entire thing, so instead we'll insist that you spend two minutes reading this very revealing piece. Just about every element of the bigger story in the U.S. retirement system is here: underfunded pensions, employers' cost-conscious transition from DB to DC plans, expensive/underperforming insurance-focused products, poor decision-making by participants, and, as a consequence of all of that and more, grossly inadequate outcomes for rank-and-file participants.

Revell is right to wonder about taxpayers' potential costs in all this. But the teachers' interests represent the other side of this troublesome coin: American workers who need--but generally aren't getting--the best possible retirement savings programs.

Source

Janice Revell, "Take this 401(k) and shove it," Money, May 20, 2008

Equity Exodus

We've spilled a lot of pixels on the topic of rank-and-file investors' decision-making in defined-contribution retirement plans. And we're pretty sure this, from PlanSponsor.com (free registration required), speaks for itself...

Participants moved assets from equities to fixed-income investments during 80% of the trading days in March, according to the Hewitt 401(k) Index.

In fact, during the first quarter of 2008, participants transferred $2.8 billion from equities to fixed-income investments on a net basis, which is the largest quarterly equity outflow during the history of the Hewitt 401(k) Index.

In March, the overall transfer activity level was slightly above the 12 month trailing average--0.05% of balances were transferred on a daily basis. Additionally, five days of the month experienced above normal transfer activity, and two of those were "high" volume days--March 10, where transfer activity was more than twice "normal" levels, and March 18, where activity was three times normal.

Note that March 18 saw an enormous move higher in the broad equity market. Alas, this sell-low capitulation came straight outta central casting.

Source

"Participant Equities Exodus Continues in March," PlanSponsor.com, April 21, 2008

401(k) Fee Disclosure

We don't understand--in fact, we don't come close to understanding--industry arguments that enhanced disclosure of 401(k) expenses would somehow be counterproductive.

Yes, getting the numbers exactly right is pretty much impossible. Helping sponsors and participants understand what they're getting for what they pay will take some work--and, given the pervasiveness of non-fiduciary practices in the retirement plan marketplace, some serious explaining. 

But when we dust off our econ textbooks, they seem to say something about information being an important component of functioning markets. Let's get the information out there. Let's help people understand it. Let's facilitate meaningful competition among industry players. Who'll benefit? Everyone. Everyone, that is, except for those who prefer to conceal their non-fiduciary practices.

Reader PM tipped us off to this editorial in Sunday's Los Angeles Times. It's spot on:

Faced with an aging workforce, corporate America has tried to cut costs by making employees take responsibility for funding their retirement. Pensions, or "defined benefit" plans as they're known in the parlance of chief financial officers, are becoming a relic of the Industrial Age. In their place, employers are offering 401(k)s, or "defined contribution" plans. And increasingly, they're passing all the costs associated with those plans on to Jack and Jill Cubicle. Companies may kick in some dollars to match workers' savings, but the burden is on employees to set aside part of their paycheck for their dotage.

Unfortunately, as this newspaper detailed in a series of articles in 2006, many employees aren't being told how much of their nest egg is being frittered away on fees paid to the companies managing their 401(k)s. Buried in the fine print of incomprehensible forms or not disclosed at all, those fees can consume thousands of dollars over time. To address that problem, several lawmakers have introduced bills that would require mutual funds, insurers and other providers of retirement plans to make complete disclosures of their fees to employers and workers. The House Education and Labor Committee gave its blessing last week to one by Chairman George Miller (D-Martinez), H.R. 3185, which would also require companies to offer workers the chance to invest at least part of their 401(k)s in a low-fee index fund to avoid potential liability for losses.

The measure has drawn stiff opposition from securities firms, which have complained that employers and workers would be confused and even deterred by a detailed disclosure of the various categories of fees. Some would prefer to reveal just the fee total. That would be a step forward, but supplying a detailed breakdown would also help employers and workers compare different providers' charges for the same administrative services. Those comparisons could prod employees to demand better deals and give employers the leverage to negotiate them.

Miller's proposal may be made moot by new regulations promised by the Labor Department and the Securities and Exchange Commission that would mandate more disclosure of investment fund fees. But Congress shouldn't trust the Bush administration or the SEC to act. Arrangements between employers and retirement plan providers that hide fees from those who pay them prevent market forces from holding down those charges. If employees are picking up the tab, they should have a range of options for their 401(k) contributions. And none of those options should be able to conceal the amount that would be burned off in fees.

All that is true enough. But as we've argued before, what matters is participants' outcomes. All else equal, low, transparent expenses are good. We think they're necessary (but not sufficient) components of fiduciary plans. After all, if defined-contribution plans continue to push investment management responsibility down to rank-and-file participants, our retirement savings system will come up short of its great potential.

Source

"Make 401(k) fees transparent," Los Angeles Times, April 21, 2008