Laws and Sausage

Today’s retirement plan advisers and their corresponding strategic partners collectively find themselves working hastily to satisfy the requirements of the Department of Labor’s passing of 408(b)(2). Full fee disclosure, however and whenever it finally moves beyond the postponed implementation date and becomes the pricing reality-reporting scheme, is positioned as yet another regulatory panacea, one which will deliver a fully funded retirement nest egg to all plan participants.

That would be nice—but are plan participants and plan sponsors actually ready for such disclosure? Many times when the consumer views the detail, one’s decision to proceed­ can become clouded. Major purchases carry a different thought process than do impulse buys. Home purchases and the corresponding thought process for buying a home are purposely structured and executed differently than anything you will see on the “impulse rack” of a store checkout line.

It is often stated that the process of making and passing laws is similar to the process of making sausage: If you were to view the process—and all components that contribute to the end result—most people would be appalled. You might even be disgusted (and choose to avoid anything that has to do with the end result). Might that also be the case with the implementation of 408(b)(2)?

Precedence in the Medical Community

There are few examples better than the one offered within the medical community. If a loved one is facing the need for major medical care such as extensive treatment or surgery, the cost of such needed services is rarely discussed. In a patient­ or family’s decision of whether or not to proceed with a serious medical procedure(s), the actual costs of the services­ are rarely considered to be the determining factor. There likely are a variety of reasons that the patient never views a price list of the anticipated corresponding required services—but price is infrequently used to justify a medical procedure. It is understood the procedure is required (to either prolong life or improve the quality of life) and the patient’s decision to go forward is not normally one of a financial nature.

Does 408(b)(2) Move Our Industry in the Proper Direction?

Directionally speaking, yes. A buyer should always have the right to ask for pricing for any product or service. (However, any and every buyer of retirement plan services has always had that right. The fuzziness of the responses from some advisers, representatives, and service providers, and their choice around concealing the pricing—and not presenting pricing as an easily discernible figure—should always send a loud and clear message to any buyer.)

In a post-408(b)(2) implementation world, will the informed­ plan participant be able to see the forest through the trees? If a participant fixates upon the cost of the­ service­ (versus the intended outcome) will they still want to defer 7% of compensation into the plan? If regulators eventually take full fee disclosure at the participant level to the lengths that RESPA has required in the Real Estate disclosure forms, will we eventually be looking at “the projection” of an amount that an adviser might charge (not make) over the life of the plan? Will each 25- or 30-year-old be viewing the “projected” fees as compounded out to age 65? In that given scenario, a 20-something might be looking­ at an “adviser fee” of well more than $100,000 during the life of a working career. When faced with such a large fee (again, fee only, not margin), what 20-something would sign up for that program? Probably the same number who would choose to sign up for major surgery on the day of the original diagnosis, if the invoice were presented along with the diagnosis. It could be close to “none.”

In the world of “full fee disclosure,” we might be in the position to deliver significantly better outcomes to plan participants if we take a page from the medical profession­ (and focus on the ultimate outcome, not the total compounded­ cost).

The best 401(k) plan in the country cannot deliver value to a plan sponsor’s employee, if that employee is shell-shocked into inaction by facing what he assumes to be an unreasonable fee.

Steff C. Chalk is CEO of the Fiduciary Consulting Group, a fee-only fiduciary consulting practice ­serving corporations and nonprofits. A judge for the PLANSPONSOR Retirement ­Plan Adviser of the Year award, and a faculty member of the PLANSPONSOR Institute, he is also the ­co-author of How to Build a Successful 401(k) and Retirement Plan Advisory Business.