The Prudent Fiduciary

Scott Pritchard | Principal

A look at the major issues that are shaping fiduciary best practices today.

Not Quite a "Game-changer"...Yet

February 2013

First proposed in 2007, Regulation 408(b)2 was hailed as “a game-changer” for the 401(k) industry. The thought was that plan sponsors who had for years been blind to the hidden costs of their retirement plans would suddenly see the light. There would be massive upheaval of the status quo.

Fast-forward six years later. We now live in a post-408(b)2 world and things look radically…the same.

But wait, what happened to “changing the game”?

Well, a funny thing happened on the way to the Forum…while 408(b)2 is now the rule of the land, two factors have thus far made the new regulation much ado about nothing:

  1. Most 401(k) service providers have continued their mastery of obfuscation.
  2. The majority of employers are still more concerned with staying in business than in understanding their 401(k) plans.

First, I use the word “obfuscation” not in an attempt to justify the 20 extra hours of classes I took to get a Minor in English, but because it truly describes how much the 401(k) industry goes out of its way in “hiding the intended meaning in communication, making communication confusing, willfully ambiguous, and harder to interpret.” 1

I’ve yet to see a 408(b)2 disclosure from a large service provider that provides a clear, succinct description of services provided, fees paid, and fiduciary status. What I have seen are lots of references to other documents, footnotes, and lengthy appendices.

While these so-called “disclosures” may meet the letter of the law, they certainly don’t meet the intended spirit of transparency.

Second, while we are more than four years removed from “The Great Recession,” many companies still feel its effects. The stock market has recovered to near-historic levels. Housing has begun to rebound. Unemployment is down. And yet, there is still a lingering need to do more with less.

In this environment, company owners, CFOs and HR managers (the very folks who are receiving the 408(b)2 disclosures from their service providers) are understandably focused on top-line growth and operational efficiencies. Saving for retirement is a tomorrow thing. Making payroll is a today thing. They simply aren’t going to take the time to decipher a 20-page disclosure, much less undertake an upheaval of their 401(k) plan.

Thus, business as usual continues in the 401(k) marketplace. But there is still hope.

Despite these dual headwinds, I still believe that 408(b)2 can achieve its original purpose. I still believe that employers want to do the right thing for their employees. I still believe a marketplace with transparent pricing will reward those who provide quality at reasonable cost.

And I believe that independent, fee-only advisors can play a critical role. Conflict-free advisors can help plan sponsors decipher the opaque disclosures they’ve received from other service providers.

Once plan sponsors actually realize what they’ve been paying for the level of service (or lack thereof) they have received, I believe that many of them will finally make the time to improve the retirement security of their employees by enhancing their 401(k) plans.

Maybe then the 401(k) industry will have the true game-changer it so desperately needs.

1, February 19, 2013


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