Fees Matter a Lot, but They're Not All That Matters

The US Department of Labor’s new fee-disclosure rules for defined contribution (DC) plans will provide participants with much more information on plan and investment-option fees. That’s good. But there’s a real risk that it may unintentionally drive participants toward making poor investment decisions, as my colleagues Mark Fortier and Daniel Notto explain below.

New DC Participant Disclosure Rules

The 404(a)(5) regulations apply to participant-directed plans for plan years that start on, or after, November 1, 2011. Initial disclosures must be provided by August 30, 2012, and fee information must be included in quarterly statements by November 14, 2012. The information provided will include details on fees in a user-friendly format, including charges for recordkeeping, loans and qualified domestic-relations orders, as well as investment sales charges and redemption fees.

Fees are important, but they should only be one of many considerations when choosing retirement investments. In the end, what should matter to investors is their long-term return and risk after fees.

Here’s a hypothetical example that highlights the potential problem. The new rules require plans to show expenses as a dollar amount for a one-year period based on a $1,000 investment. Let’s say a participant finds that the target-date fund he’s invested in costs $8.00 per year while employer stock costs only 20 cents.

The participant might decide to reduce his investment costs by shifting 20% of his plan assets from the target-date fund to employer stock. But such a heavy concentration in a single stock would drive up the risk of his plan investments. There’s a good reason why target-date funds, not employer stocks, are qualified default investment alternatives.

This is not a far-fetched example. In response to a recent survey of more than 1,000 US DC plan sponsors that we’ll be releasing soon, only 27% said that their participants are very comfortable or comfortable with investing. The vast majority of participants are what we refer to as “Accidental” investors who are uncomfortable making investment decisions.

Participants need appropriate guidance about how to respond to the new fee information. Fortunately, our survey also found that plan sponsors are ready to provide it: 85% said that helping employees make effective investment decisions is very important or important. That help will probably be provided through sponsors’ call centers, because behavioral testing has shown that participants are more likely to pick up the phone to ask a question than read through fee disclosures.

Notes, flyers, educational materials and call-center scripts: all these tools should encourage participants to consider every relevant factornot just annual costwhen choosing an investment option. If available, an in-plan financial advisor can serve as an additional resource, providing more investment advice than plan sponsors are permitted to offer.

Under related 408(b)(2) rules, discussed in an earlier article, plan sponsors will be responsible for ensuring that investment fees are reasonable. When fees turn up in quarterly statements, participants will be better informed as to the impact of those fees. Plan sponsors can help participants consider fees in the proper context when making investment decisions.

"Target date” in a fund’s name refers to the approximate year when a participant expects to retire and begin withdrawing from his or her account. Target-date funds gradually adjust their asset allocation, lowering risk as participants near retirement. Investments in target-date funds are not guaranteed against loss of principal at any time, and account values can be more or less than the original amount invested, including at the time of the fund’s target date. Also, investing in target-date funds does not guarantee sufficient income in retirement.

Seth Masters

Chief Investment Officer—Bernstein
Seth Masters is Chief Investment Officer of Bernstein. He heads the team that provides customized wealth-planning advice and manages the firm’s private client portfolios. Masters was previously CIO for Asset Allocation, overseeing the firm’s Dynamic Asset Allocation, Target Date, Target Risk and Indexed services. In June 2008, he was appointed head of AllianceBernstein’s newly formed Defined Contribution business unit, which has since become an industry leader in custom target-date and lifetime income portfolios. Masters became CIO of Blend Strategies in 2002 and launched a range of style-blended services. From 1994 to 2002, he was CIO of Emerging Markets Value Equities. He joined Bernstein in 1991 as a research analyst covering global financial firms. Masters has frequently been cited in print and appeared on television programs dealing with investment strategy. He has published numerous articles, including “The Case for the 20,000 Dow”; “Long-Horizon Investment Planning in Globally Integrated Capital Markets”; “Is There a Better Way to Rebalance?”; and “The Future of Defined Contribution Plans.” Masters worked as a senior associate at Booz, Allen & Hamilton from 1986 to 1990 and taught economics in China from 1983 to 1985. He holds an AB from Princeton University and an MPhil in economics from Oxford University. He is fluent in French and Mandarin Chinese. Location: New York


Mark N. Fortier, CFA
Head—Product & Partner Strategy

Mark N. Fortier is Head of Product & Partner Strategy, responsible for developing and supporting AllianceBernstein’s defined contribution (DC) product solutions for plan sponsors and intermediaries. In addition, he focuses on establishing strategic partnerships and integrated solutions with recordkeepers, insurance companies, investment managers and investment consultants. Previously, Fortier was a senior portfolio manager focused on DC products for the AllianceBernstein Blend Solutions team. Prior to joining the firm in 2007, he was senior vice president and CTO for Diversified Investment Advisors, a subsidiary of AEGON, where he specialized in retirement plans for the mid-to-large market and was responsible for technology, investment solutions and participant communications. Fortier holds a BA from Columbia University and an MBA from New York University. He is a CFA charterholder. Location: New York

Richard A. Davies

Senior Managing Director, Global Head—Defined Contribution and Multi-Asset Business Development
Richard A. Davies is Senior Managing Director and Global Head of Defined Contribution, responsible for the overall leadership and strategic direction of AB’s global defined contribution and multi-asset businesses. He previously served as co-head of Institutions for the firm’s North America Client Group, while leading its US defined contribution activities. Davies rejoined AB in 2013 after spending several years leading Russell Investments’ institutional defined contribution business. During his earlier, 16-year career with AB, he led the firm’s institutional defined contribution, sub-advisory, and retail retirement and college savings businesses. Davies also served as head of global marketing and product management and led several business lines and distribution channels for the mutual funds group. He joined the firm in 1995 from First Chicago Corporation, where he served as president of retail investment services and was a managing director of First Chicago Investment Management Company. Prior to joining First Chicago in 1989, Davies was a strategy consultant and manager with The Boston Consulting Group. He worked in brand management for Procter & Gamble before attending graduate school. Davies holds a BA in economics, with honors, from the University of Wisconsin, Madison, and an MBA from Harvard Business School. He chairs the Advisory Board of the University of Wisconsin’s economics department. Davies is a Trustee of the Employee Benefit Research Institute and was a founder of the Defined Contribution Institutional Investment Association. Location: New York

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