IMHO: "Reasonable" Doubts

December 4, 2006 ( - We got yet another call for 401(k) fee transparency last week.

The latest – a report from the Government Accountability Office (GAO) at the behest of Congressman George Miller (D-California) – painted a relatively bleak picture of both the impact of fees on retirement savings,   and on the ability of plan participants (not to mention plan sponsors and government regulators) to discern what they are paying for.   Before the week was out, the Investment Company Institute   (ICI) had published a report with a similar focus – but with a much different conclusion.

For the most part, the GAO report didn’t plow any new ground.   In fact, IMHO, any self-respecting retirement plan professional could have written the report (or at least bulleted its conclusions) in their sleep.   The bottom line: Fees can have a huge impact on retirement savings, but few seem to know what fees they are paying, and they have to work hard to know what little they do know.   In contrast, the ICI report conveyed the kind of calm, reassuring perspective on mutual fund investment by 401(k) plans that one would expect from the mutual fund industry’s chief lobbying group.   But I would sum it up as follows: Compared with retail mutual fund investors, 401(k) plan participants are getting a good deal.    

Plan fiduciaries are, of course, charged with ensuring that both the fees AND THE SERVICES PROVIDED (emphasis mine) are reasonable.   I know of no way to fulfill that obligation without a complete understanding of the services you are receiving, and the price you are paying for them.   Unfortunately, we live in a world where the vast majority of fees paid by retirement plan participants are funded from a single fee source – the imbedded expense ratios of mutual funds.   At some level, most of us can, with at least some effort, as the GAO report notes, know how much we are paying.   And, with the assistance and complicity of providers and fund complexes, we can – again, with some effort – discern how much money is going to whom, and for what purpose(s).    

Fees, like death and taxes, are a given in the world of retirement plan savings (believe if or not, one of the “key findings” in the ICI report was this little factoid:   “Employers offering 401(k) plans typically hire service providers to operate these plans, and these providers charge fees for their services”).   Furthermore, despite a growing interest in, and awareness of, the need for transparency in such matters, we still seem to be a long way from the solution – perhaps even in terms of deciding what the problem is that we are trying to solve.

I would suggest that we’re trying to make sure that relatively unsophisticated participants aren’t being ripped off by a system that has been afforded certain privileges to, at least ostensibly, help them.   Secondly, we’re trying to arm and/or inform those charged with overseeing those programs – plan sponsors, advisers, and yes, even regulators – with the information they need to provide effective oversight.   Finally – and while this goal is perhaps less explicit, it seems most important – I believe we are finally creeping up on the ability to articulate what the “right” answer is when it comes to determining what is “reasonable.”

It’s not likely to be easy, however.   Consider that one of the tools referenced in the GAO report was the Department of Labor’s Fee Disclosure Form, and you need look no further than this multi-page template to gain a sense for the challenge confronting this effort – not just to identify the charges, but to understand their applicability to an individual plan – and to be able to compare them against competing platforms and fee structures.     

It will take more than mere transparency to get there, of course, but we’ll never know if they are reasonable if we don’t know what those fees are in the first place.   It’s the difference between an assurance that fees are reasonable – and having reasonable doubts.

Editor's Note:   Some interesting excerpts from the GAO report:

  • In fiscal year 2005, Labor received only 10 inquiries or complaints related to 401(k) fees.
  • Labor officials told us that it is difficult to discern whether a fee is reasonable or not on its face, and therefore, investigators rarely initiate an investigation into a fee's reasonableness.
  • Labor's most recent in-depth review of fees identified some plans with high fees but determined that they were not unreasonable or in violation of ERISA.
  • In some cases, Labor did determine that participants were paying high fees. It referred these cases—which included insurance products and international equity funds—to a fee expert from academia for further analysis to determine if the fees were unreasonably high. The expert determined that the fees were high, but not unreasonable.

The GAO report is online at

The ICI report is online at

The DOL Fee Disclosure form is online at