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Retirement Planning > Saving for Retirement

Why Disclosures Don't Work

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Do you believe that disclosure is an effective tool in helping retail investors make smart investment decisions? With both SIFMA and FINRA in large part basing their resistance to the Dodd-Frank mandate for a fiduciary standard for brokers on the notion that disclosure would be just as effective in protecting investors, it’s both a timely and important question for independent advisors. To shed a bright light on the subject, Rebalance IRA recently released a survey of 401(k) participants that may cause you to reconsider. 

In the middle of September, the online cyborg advisory site (part robot, part human)—is most notable for boasting humans Burton Malkiel, Charlie Ellis and Jay Vivian on its investment committee—released the findings of an online survey of 1,165 U.S. pre-retirement adults, ranging from 50 to 68 years of age. When asked what the participants paid in retirement account fees, here’s how they responded:

  • 46% believed that they don’t pay any fees at all.
  • Another 19% percent said that their fees are less than 0.5%.
  • Only 4% of those surveyed believe they pay over 2% in retirement account fees.

I’m assuming here that you already know all retirement plan participants pay some fees, but to put these responses into perspective, the survey cites “a recent 401(k) Averages Book, published by, which tells us that the average employee pays 1.5% in fees each year, with some plans charging as much as 3.86%.”

The takeaway here is that it’s pretty clear most investors in retirement funds don’t have any idea what they are paying in fees. And the disclosures for retirement funds are heavily regulated by the Department of Labor, including, as the survey points out “a rule by the DOL that went into effect in 2012 requiring plan sponsors to provide greater transparency about fees.”

But as the survey puts it: “there remains a great deal of confusion among consumers. Many full-time employed baby boomers do not have a clear understanding of the fees they are paying in their retirement accounts.” 

What’s more, Rebalance IRA cited an earlier survey, in which “respondents stated an average return in 2013 of 5.2%, but the target benchmark indexes were up 9%, meaning their retirement investments underperformed by 4.3%. Yet more than half of respondents, 55%, reported that they were satisfied with their returns.” 

The answers to some of the other questions in the survey suggest that a significant number of investors feel some trepidation about their retirement portfolios, even if they can’t put their fingers on the reasons. While 73% said they are “actively saving for retirement,” 65.8% admitted to “feeling some anxiety about retiring with enough money” while only 32.6% felt “satisfaction with their retirement finances.”

Professor Malkiel (author of A Random Walk Down Wall Street) summed up the survey this way: “Fee obfuscation has been around as long as there have been fees, and this survey is proof that the industry is still winning the battle… …The trick now is to make people realize the truth of what they’re really paying, because I can guarantee that whatever it is, it’s not nothing, and it is likely to be substantial.”

Indeed, the “industry” is still winning the battle, and if it has its way, it will keep winning the battle by replacing a duty to put its clients’ interests first with the same kind of disclosure it uses in its retirement funds.

Rebalance IRA provides a valuable public service by sponsoring research such as this (and no small amount of positive PR exposure as well).

It makes me wonder why the financial planning organizations—the FPA, NAPFA, and the CFP Board—don’t devote more resources to providing this kind of consumer-oriented research. Instead of spending millions of dollars telling investors that planners are great, perhaps showing investors how financial services really works would help them to see why planners really are great.

Just a thought.


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