Lifetime Income Disclosures—Thanks for another less than worthless disclosure which misleads AND adds to participant paid administrative expenses.[i]
First, a little history regarding today’s current events.
Did you notice SECURE 2.0, Section 340. Defined Contribution Plan Fee Disclosure Improvements? That provision requires the Secretary of Labor to review the results of fee disclosure regulations which took effect in 2012 and to send a report to Congress within three years. So, to reconfirm the timeline:
- The Department of Labor (DOL) publishes a notice of proposed rulemaking regarding fee disclosures per ERISA §408(b)(2) in the Federal Register (72 FR 70988) on December 13, 2007.
- The DOL publishes a notice of proposed rulemaking regarding fee disclosures per ERISA §404(a)(5) in the Federal Register (73 FR 43014) on July 23, 2008.
- The DOL finalizes fee disclosure regulations in the Federal Register (75 FR 64910) on October 20, 2010.
- The effective date was delayed until the 3rd Quarter, 2012.
- Ten years later, in July 2021, the Government Accountability Office (GAO) issued a report entitled, “401(k) Retirement Plans: Many Participants Do Not Understand Fee Information, but DOL Could Take Additional Steps to Help Them.”
- Over a year later, we get SECURE 2.0, Section 340, which requires a report to Congress (not necessarily proposed actions) by December 2025, and…
- Months later, the DOL issued a Request for Information asking for stakeholder input on fee disclosures (88 FR 54511, August 11, 2023).
So, 15+ years later, after 10+ years of increased participant-paid expense, we have a new initiative where Congress wants the DOL to identify “… beneficial education for consumers on financial literacy concepts as related to retirement plan fees …”. Should the report prompt compliance changes, many expect they will add to participant-paid expense, without demonstrable value to participants.
A day late and a dollar short.
What should Congress have done? Congress should require every regulation subject to Executive Order (EO) 12866[ii] be evaluated no more than five years following implementation with respect to the accuracy of the cost/benefit estimate required by EO 12866, and require suspension and re-evaluation whenever the projected net savings were not achieved. That would prompt the responsible agency to adopt metrics and measure outcomes.
What should the DOL do? While that analysis was not specifically included in SECURE 2.0 Section 340, the DOL should include such an evaluation in their report to Congress.
I am confident any economic analysis of fee disclosures will confirm that the costs dramatically exceed the benefits. Here is my own estimate from 2012:
“Over the next ten years, let’s increase the fees paid by individual account plans, like the 401(k), by hundreds of millions of dollars per year to deliver newly mandated fee and investment information that no participant specifically asked for, few will read, even fewer will understand, and still fewer will correctly apply in their investment decision-making. Practical experience and careful evaluation of the proposed regulation cost benefit analysis suggests that perhaps, at most, 10% of participants will save an average of $3.79 per year in time spent researching fee information, generating over $27 million of net savings to be spread over seven million or so participants. However, the other 90% of participants will experience no identifiable savings (they do not spend any time researching fees today) but will incur annual per capita costs estimated as $11.10 (as most fees are ultimately paid by participants). That is over $712 million per year in increased costs spread over seventy million or so participants!”
I concluded that fee disclosure regulations were misleading in that they:
“… fail to suggest, let alone require the plan sponsor to focus any attention whatsoever on the main reason for differences in fees among plans—by failing to require disclosure of a comparable “all-in” fee for plans of comparable size and composition. …”
Yes, a minority of participants may have benefited from fee disclosures. However, it was no surprise to find out that many, most participants still do not understand 401(k) fees.[iii]
More importantly, what difference does it make if participants understand their fees? Few plans offer more than one Core investment in each asset class.[iv]
Lifetime Income Disclosures
The DOL estimated first year costs of $201 million, $6.6 million in the second year, and $4.8 million in the third year. The DOL estimated benefits in the form of: “… strengthening retirement security by encouraging those currently contributing too little to increase their plan contributions; and making lifetime income information readily available, which will save some participants time in understanding how prepared (or unprepared) they are for retirement. …”
OK, we now have two years of lifetime income illustration experience, please share your outcomes:
- Who shouldered the costs of compliance, the plan sponsors, or participants,
- Which participants read and understood the disclosures, adjusted for inaccuracies in the assumptions (age 67 commencement, spouse with the same birthdate, etc.), and were able to place the estimated lifetime income in the larger context of other retirement assets, Social Security, and future savings—none of which are displayed using the same assumptions, and
- Which participants, having accurately identified a shortcoming in their savings rate, accurately increased their contributions?
My bet is that no one knows any details. Perhaps a decade from now, we will get a GAO report.
SEE ALSO:
- What We Need in Retirement
- More Problems with Lifetime Income Disclosures
- Mandated Fee Disclosures: Participants Pay … But Get Little in Return
I am always interested in your comments, corrections, criticisms, and suggestions. Send them to me at jacktowarnicky@gmail.com
Disclaimer No. 1: My comments are my own based on my past experiences in plan sponsor and consulting roles and do not necessarily reflect those of any employer or association I have been employed by or affiliated with, past, present, or future.
Disclaimer No. 2: Information was provided by individuals with knowledge and experience in the industry and not as legal or tax advice. The issues presented here may have legal implications, and you should discuss this matter with legal counsel prior to choosing a course of action. This article is intended to be informational only. It is not and you/others should not use it as a substitute for legal, accounting, actuarial, or other professional advice. Any advice contained in this article was not intended or written to be used and cannot be used by anyone for the purpose of avoiding any Internal Revenue Code penalties that may be imposed on such person [or to promote, market or recommend any transaction or subject addressed herein]. You (others) should seek advice based on your (their) particular circumstances from an independent tax advisor.
[i] J. Towarnicky, The Problems With Lifetime Income Disclosures: A voluntary estimate of lifetime income based on accumulated savings has merit, but … 5/31/22. “… Mandated lifetime income disclosures are as likely to reduce account balances as to increase them, and they are more likely to mislead than inform. …” Accessed 12/28/23 at: https://401kspecialistmag.com/the-major-problems-with-lifetime-income-disclosures/ See also: J. Towarnicky, More Problems with Lifetime Income Disclosures: They may worsen after updates, 6/20/22. “… participant received: (1) An incomplete picture (as the projection only applies to some of his assets), (2) A warning about volatility (without any guidance on how (not) to respond), but mostly, (3) Confusion.” Accessed 12/28/23 at: https://401kspecialistmag.com/the-major-problems-with-lifetime-income-disclosures/
[ii] President Clinton, Executive Order 12866, Regulatory Planning and Review (58 FR 51735, October 4, 1993), Accessed 12/28/23 at: https://www.reginfo.gov/public/jsp/Utilities/EO_Redirect.jsp
[iii] J. Towarnicky, Tripping Over Our Own Fee(t)s: Can Plan Sponsors Avoid a Myopic Focus on Fees? Benefits Quarterly, 3rdQuarter 2022.
[iv] 65th Annual Survey, 2022, Plan Sponsor Council of America. Average number of Core investments = 16 to 20 (counting a series of target date funds as one fund choice). Average number of actively managed domestic equity funds: 5.3, Average number of actively managed bond funds: 2.0, Average number of actively managed international/global equity funds: 1.8; Average number of passively indexed domestic equity funds: 3, Average number of passively indexed bond funds: 1.2, Average number of passively indexed international/global equity funds: 1.2.
Jack Towarnicky provides independent benefits consulting and serves as a member of aequum, LLC and of counsel for Koehler Fitzgerald, LLC.