Transparency is a major goal of two Department of Labor initiatives which will affect most retirement plans, particularly the roughly 500,000 participant-directed defined contribution plans, such as 401(k) plans, in America today. Both initiatives came to fruition this summer.
The first initiative requires most service providers of retirement plans (whether or not participant-directed) to disclose their services and fees, including those paid by third-parties, such as other providers or investment houses. The requirement to disclose indirect compensation includes the requirement to reveal who is paying the compensation and why. Some providers must also disclose information relating to some or all of the plan’s investments.
Imagine a 401(k) plan that does not allow participants to direct the investment of their accounts, a plan where trustees make investment decisions on behalf of the plan as a whole. Some might consider that blasphemy. Participants want – no, they have a right – to direct the investment of their retirement accounts.
As radical as it sounds, it was not that long ago when participant investment direction was rare. Technology has been the single biggest factor in enabling plans to permit participant directed investments. Throw in a threat of fiduciary liability, some marketing, and we have a train that cannot be stopped. I am not suggesting that this train needs to be stopped. I do, however, think it is time to step back and take a look at where this train is headed.
The human body is a highly complex, self-contained entity that relies on several subsystems to function. A failure in any one of these systems could create a real crisis. No one would like being told that his/her brain, cardio-vascular, endocrine, nervous or other system might stop functioning or begin to “over function.” The results could be disastrous. Like the human body, the global economy is an extremely complicated organism that has many different parts. Regulation, taxation, business climate, employment, politics and other systems — all have the potential to dysfunction, creating a crisis that can impact your wealth.
According to InvestorWords.com, a defined contribution plan is “A company retirement plan, such as a 401(k) plan or 403(b) plan, in which the employee elects to defer some amount of his/her salary into the plan and bears the investment risk.” While there are many other sources for this definition, I chose this one for a reason. The primary purpose for participating in a defined contribution plan is for participants to save for their own retirement. While I sometimes understand people need to be protected from themselves, participants should be responsible for bearing the investment risk, rather than the plan. Plenty of rules and regulations are already in place to protect the interests of plan participants.
According to a recent Wall Street Journal article 401k Plans Step into the Sunshine: New Labor Department Rules Will Require Fee Disclosures, “The rules governing America’s most popular retirement vehicle are about to change, and that could mean huge savings for millions of workers building nest eggs for the future.”