Employee Fiduciary LLC Calls On DOL to Improve 401(k) Fee Transparency

Retirement plan advisory Employee Fiduciary LLC called on the Department of Labor, via public comment, to make fees in 401(k) plans “as transparent as possible” by making changes to the design and content requirements of annual fee disclosures.

Sections 340 and 341 of the Secure 2.0 Act of 2022 call on the DOL and the Department of the Treasury to review defined contribution plan fee disclosures and plan notices provided to participants, giving Congress three years to amend fee disclosure rules and two years to consolidate required plan notices. The DOL posted a request for public feedback on these sections and other provisions of SECURE 2.0 on August 11.

Eric Droblyen

Employee Fiduciary, which provides recordkeeping and third-party administration to small businesses, argued in its response that fee and reporting disclosures, as currently addressed by the Employee Retirement Income Security Act, are not standardized, allow for “hidden” fees within investment funds and do not properly explain the aggregate effect of fees over time in retirement saving plans.

“Given the cumulative effect of 401(k) fees, we think their dollar amount should be as transparent as possible,” Eric Droblyen, president and CEO of Employee Fiduciary, wrote in the letter. “We also think that the cumulative effect of fees explanation must be more prominent and compelling.”

The advisory recommended three areas for improvement in defined contribution fee disclosures:

• Standardize plan-related information: Employee Fiduciary suggested the introduction of a model chart for administrative and individual expenses so participants can benchmark their total fees paid against other plans.
  
  “Administrative expenses tend to be flat (based on the number of plan participants) or asset-based (based on a percentage of plan assets), while individual expenses usually relate to distributions and loans,” Employee Fiduciary wrote. “Given the small number of expense types, we recommend the Department develop a model for plan-related information to help participants total and benchmark their fees.”
  
  
• Make “hidden” fees more transparent: The firm recommended requiring the breakout of indirect administration fees from fund operating expenses to provide a clear view of charges that participants are paying for being invested in specific funds.
  
  “Without a doubt, ‘hidden’ fees are the top reason why Americans are confused about their 401(k) fees today,” the firm wrote.

• Highlight the cumulative effect of fees: Finally, the firm recommended shifting the focus of annual fee disclosures to a more comprehensive view of how fees, compounded over time, will impact participants’ retirement savings.
  
  “In our experience, most 401(k) participants have no idea how dramatically the cumulative effect of fees can impact their retirement savings over time,” Employee Fiduciary wrote. “We think two changes to the annual fee disclosure can help. First, move the cumulative effect of fees explanation from the comparative chart to the opening. Second, add a graphic illustration to the cumulative effect of fees.”

In the letter, Employee Fiduciary referenced a 2021 study by the Government Accountability Office, which found that almost 40% of 401(k) plan participants have difficulty understanding plan fee information disclosures. The government office also found that 45% of participants are not able to use the information given in disclosures to determine the cost of their investment fees, while 41% incorrectly believe they do not pay any 401(k) plan fees.

The DOL did not immediately respond to a request for comment on the proposal.

The comment period for SECURE 2.0 provisions runs through October 10, according to a notice in the Federal Register.