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Practice Management > Compensation and Fees

It’s time to reboot 408(b)(2)

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Some say it’s too early to tell. Others say it’s adding some value already. But the vast majority of 401(k) fiduciaries believe 408(b)(2) – aka the 401(k) fee disclosure rule – is the biggest summer flop this side of “The Lone Ranger.” (See “401(k) Fee Disclosure One Year Later: What We’ve Learned,”, July 16, 2013). 

This is why I agree with the majority. To those who claim there’s been some movement toward lower fees, I say, yes, the trend has been toward lower fees for some time now. We see lower fees in two ways. First, the ICI has documented the move away from 12b-1 fees in mutual funds over the last decade or more. In addition, there’s been an overall reduction of advisor fees as advisors have come to realize you can’t charge the same amount for picking mutual funds that you charge for picking stocks.

See also: The missing link of 401(k) fee disclosure

On this latter point, I remember speaking on providing to 401(k) plans at an industry conference in Washington, D.C., about eight years ago. An ebullient attendee came up to me afterword to exclaim his agreement with my presentation. I asked him what service he provided. He said he was an investment advisor to 401(k) plans. Then he told me what he charged. It was the same I charged private portfolio clients for selecting individual securities as part of the portfolio management service I provided. I didn’t have the heart to tell this fellow I charged less than one-third to 401(k) plans for picking mutual funds for them. 

Apparently, the competitive market had no problem letting him know. 

So, fees are going down. But they’ve been going down. I’ll leave it for some academic study to prove whether last summer’s 401(k) fee disclosure rule had a significant contribution to these lower fees. For now, I’ll just chalk it up to the continuation of an ongoing trend. 

For those who insist we haven’t given the rule enough time, I’ll harken back to the scientific process. Before the implementation of the rule, many knowledgeable analysts predicted disclosed fees would be remain hidden in a core dump of paper. This appears to have been precisely what has happened in many of the worse cases. In the language of science, we offered a hypothesis, we ran a test and we proved the hypothesis. Ergo, for a good many people, 401(k) fee disclosure has failed. 

But, in a twist on Antony, I come not to bury 408(b)(2), but to praise it. The intent of exposing hidden fees is an honorable one, and the DOL’s fee disclosure rule is an honorable rule. It just needs a little tweaking. I’m not alone in suggesting this. Indeed, from the very beginning many predicted the failure of the rule would come from the omission on the part of the DOL to create a single-page disclosure form. Remember, the DOL wants service providers to list the actual fees for the specific services rendered. There aren’t that many services 401(k) plan sponsors need, and they can certainly fit on a single sheet of paper.

Better yet, make this single sheet of paper a required filing. Heck they can even simplify the whole thing by doing a quick fix on the Form 5500 so each fee for each service is automatically listed and then filed. Then the DOL can aggregate the data and publish it for benchmarking purposes.

Then there’d really be nothing to hide. 


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