New Fee Disclosures for US DC Plan Participants: Context Is Key

The US Department of Labor’s new 404(a)(5) fee-disclosure rules for defined contribution (DC) plans will provide participants with a lot more information on plan and investment fees—in plain language. That’s a good thing. But there’s a real risk that the new rule may unintentionally drive participants to make poor investment choices.

The rules apply to participant-directed plans for plan years starting on or after November 1, 2011. Participants must be given a chart every year that shows information about each available investment option, including its expense ratio and performance.

Expenses are certainly important when evaluating investment options, but they shouldn’t be the only consideration. What really matters is how effective an investment will be in contributing to long-term retirement savings.

Here’s a hypothetical example provided by my colleague Dan Notto, our firm’s Senior Retirement Plan Counsel, which highlights the potential problem in focusing only on fees. The new disclosure will display expenses stated as an annual percentage and 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 yearly per $1,000, while employer stock costs only 20 cents yearly per $1,000.

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 isn’t a far-fetched example. In a survey of over 1,000 US DC plan sponsors that we’ll be releasing soon, only 27% of respondents 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.

These participants need the right guidance on how to consider 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 and ask a question than to read through fee disclosures.

Notes, flyers, educational materials and call-center scripts are ways plan sponsors can encourage participants to consider all the relevant factors—not just cost—when making investment decisions. If participants have access to a financial advisor, this can be an added resource, offering more investment education or advice than plan sponsors are willing to offer.

Under related 408(b)(2) rules, which I discussed in an earlier post, 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 be a big help in guiding participants to consider fees in the proper context when making investment choices.

“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.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

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

Richard A. Davies

Senior Managing Director, Global Head of 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 AllianceBernstein in 2013 after spending several years leading Russell Investments’ institutional defined contribution business. During his earlier, 16-year career with AllianceBernstein, 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 Alliance Capital 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 and continues to serve on the Executive Committee of the Defined Contribution Institutional Investment Association. Location: New York

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