New regulations that went into effect July 1 require service providers to disclose all of their expenses to retirement plan sponsors. And even though mandated disclosure has only been in effect for a few weeks, plan sponsors are already bailing on service providers that charge excessive fees.
Why the exodus? This same information will be communicated to plan participants starting August 30. A high percentage of participants are not going to like the numbers that are reported to them.
Investment News reported that some plan trustees were unaware of the combined fees they were paying to layers of service providers: consultants, money managers, custodians, broker/dealers, and administrators. This is not new information. We know Wall Street companies are adept at burying data in fine print, so it takes substantial amounts of time and expertise to calculate all of the fees that are being deducted from the account balances of plan participants.
This explains why a lot of trustees are concerned about disclosures that have to go to participants at the end of August. They have a fiduciary responsibility to manage expenses, and they have not been doing a very good job. Consequently, some plan sponsors are in a rush to make changes so they can paint a more positive picture for their participants.
What does this have to do with you? First of all, you may be a participant in a 401k plan that is paying excessive expenses. Starting August 30 you should have access to data that documents your plan's total payments. The higher the expenses, the less money you will have available for retirement. If the expenses are off the charts, and have been that way for a long time, you have a good case to demand offsetting contributions from your company.
I think there is an even bigger expense issue. If Wall Street rips off institutional investors with large asset amounts, how is it treating individual investors with smaller asset amounts? Higher expenses mean bigger revenues and profits for Wall Street companies. They also mean higher incomes for financial advisors and bigger bonuses for company executives. Needless to say, Wall Street companies and professionals have a lot of incentive to extract the highest possible fees from their clients. The proof is in the headlines.
There is no Department of Labor regulation that requires Wall Street to disclose expenses to individual investors. As usual, you are on your own. So how do you determine the amount of layered fees you are paying to the various service providers?
You can develop your own tools to obtain this information, or you can use the free tools on the Investor Watchdog Website. You open a free account to gain access to Watchdog tools. You should select the quarterly Monitor service to obtain the information you need to evaluate all of the charges that are deducted from your personal investment accounts. This service will also track future expenses on a quarterly basis. Hopefully, you can watch them go down as a percent of your assets.
So what are fair and reasonable expenses? There is no easy answer for this question. It depends on your amount of assets because most providers have sliding fee schedules. The number of services you use and the companies that provide the services charge a broad range of fees. You can develop your own answer by demanding full disclosure for all expenses from your current service providers. If they refuse to disclose the information, terminate them and find providers that are willing to document their fee schedules, billing practices, and total expenses.