It’s the same with mutual funds. "We know it’s a big name and if Morningstar gives it five stars," she says. But ultimately, "we don’t know if we are doing anything good for our retirement."
As the manager of the defined-contribution plans at Trinity Health, a Novi, Michigan-based health care provider, Frank is among a growing number of retirement plan administrators who are working to put some labels on retirement investment. Specifically, they want to disclose mutual fund fees to plan participants.
In the wake of the mutual fund and corporate scandals, many employers are more sensitive to the fees that they and their employees are paying. "It’s in the papers every day, and it just makes common sense that employees should understand exactly what they are paying," Frank says.
But Frank, like many in her position, is trying to figure out how much disclosure is too much. Providing fee information seems like the right thing to do, but companies also run the risk of opening a Pandora’s box.
"When you send complex information out to a group of people who might not be educated on the subject, you are asking for a lot more work," says Al Otto, who oversees the retirement plan services group as a vice president at White Horse Advisors, an Atlanta-based financial planning firm.
Companies may risk scaring their employees into inertia by disclosing too much information, warns David Wray, president of the Profit Sharing/401(k) Council of America.
"The vast majority of 401(k) participants are financially illiterate," he says. If employers’ fee discussions just confuse employees, they may well put their retirement investments in low-interest money market funds, he says. "These people are not asking for disclosure."
For its part, Trinity is only disclosing the fees that the employee pays. In Trinity’s case, these fees are only the expense ratios of the funds. While the company is also doing a review of what the plan is paying its administrator and investment managers, Frank feels that such information would overwhelm the average employee.
Nevertheless, only providing the expense ratios for the funds is not as simple as it may sound. The costs can vary depending on the size of the plan, number of participants and types of funds being offered. "The thing about fee disclosure is that there are all these variables and they are moving parts," Frank says.
Peter Kunkel, COO of Diversified Investment Advisors, which is Trinity’s service provider and is working on creating the fee disclosure documents, says figuring out an appropriate benchmark is an issue many plan sponsors are dealing with because there is no standard. "It’s not an exact science," Kunkel says. "But at least you are giving participants something to compare against, even if it is not exact."
Many companies, like IBM, offer dollar-weighted averages for each of their funds. By doing this, IBM can show participants how the fees in its plan compare to those with plans of a similar size, says Jim Rich, chief investment officer at IBM Retirement Funds.
Wray argues that benchmarking fees is a mistake that will just wind up confusing employees more. "Once you start down that road, you need to have very sophisticated explanations about what it’s all about," he says.
Frank, however, believes that providing some type of benchmark is essential to give employees perspective. But she does agree with Wray that simplicity is key.
Trinity is working to get its fee-disclosure sheets down to two pages. The trick is to determine what information is helpful and what’s overkill. "On one side we want to have the statistics, and then the other side is going to be all the definitions of plan service fees, investment fees and information about where to go if they have questions," she says.
For now, Trinity is going to offer the information only to employees who request it. Industry consultants applaud the decision, especially since many expect that regulators will eventually require that employers disclose this information to employees. "Communications is going to be on the agenda of the regulators," says Pam Hess, defined-contribution investment consultant at Hewitt Associates. "Employers are going to have to talk about this in the next 12 months."