Sometimes it takes an act of Congress to straighten out a few kinks in the financial services sector. I was leafing through the final version of Congressman George Miller's bill calling for disclosure of all 401(k) fees and was amazed at how comprehensive the end result appears to be. If this bill had been in place over the last 20 years, the average 401(k) participant would probably have about 20 percent more money today.
Sixteen of the nation's largest companies would have been spared the embarrassment of being sued for having charged excessive hidden fees.
In simple terms, the bill forces the mutual fund and insurance industries to disclose every component of what 401(k) participants are being charged. The most intimate details of money management and administrative pricing will be front and center as a starting point for any effective shopping or negotiating exercise.
This creates a level playing field for all of us with our combined several trillion dollars sloshing around in these plans.
I see this bill leading to overall improvement in the health and effectiveness of the 401(k) industry. While there is a growing amount of money these plans have attracted, thanks to both contributions and inevitable growth in stock values, there is a smaller growth curve applicable to the number of people and institutions required to do the work.\
The costs charged as a percent of assets increases exponentially, but the cost of keeping track grows on a linear basis. The actual work involved to maintain a $100,000 account is exactly the same as a $10,000 account.
The value of this business model wasn't lost on the financial services industry, and it prompted the rush on the part of most fund and insurance companies to get into the 401(k) business over the last 25 years.
Unfortunately, it is an extremely difficult business to operate effectively, because these plans have to operate in compliance with a vast collection of rules and regulations that ensure that they not discriminate in favor of just highly compensated employees. Those rules, for anyone interested, are SUMMARIZED in four binders the size of telephone books.
As a result, major financial institutions like Prudential have given up periodically and told their clients to seek administration elsewhere. Others, like Great West Life, have developed partnerships with regional retirement plan administration firms and then abandoned the partnerships when the relationships didn't work out. A revolving door characterizes those responsible for anything beyond money management.
Beyond compliance with complicated rules is the challenge of dealing with contributions every pay period and the potential for employee participants to change investments on a daily basis. Seamless, on-line. electronic. recordkeeping systems have been developed that are far more user friendly than the pools of money that were periodically valued in the early days.
All this points to a coming era where participants are poised to receive a better value --- a more cost-effective opportunity to save for retirement.
I'm not sure how much of this sea change would have taken place without a growing emphasis on the part of the government to step in and officiate. The temptation to charge more than necessary has been just too great in an industry where buyers were not price sensitive --- where nobody ever received a bill or had to write a check for their 401(k) money management and administrative services.
Now, we participants still won't have to write a check or pay a bill (the cost is automatically deducted every day and typically amounts to something between 0.5 percent and 2.0 percent per year.) However, our total cost in dollars will be staring us in the face at least once a year based on the provisions of this bill.
This level of transparency should lead to more effective choices of 401(k) vendors and investment selection going forward. Not surprisingly, some of the largest 401(k) vendors are conducting a major lobbying effort in an effort to get themselves excluded from this bill claiming that providing the information will be "too confusing" for participants and "too expensive" to provide.
This is an industry that, in the aggregate, makes a 30 percent pre-tax profit, so I think they have room to bend a little on this issue.
Any employee saving a full percentage point in fees per year will have almost 50 percent more money in retirement 30 years later, and an industry with five to 10 times more money to manage --- even at half their current rates --- certainly won't be suffering.
Way to go, Congressman Miller.