Posted by Kathy Stewart on July 25, 2013
>>>>The focus on excess retirement plan fees continues to make headlines. Most recently, we learned of 6,000 or so letters sent by a Yale professor to plan sponsors indicating that the fees they are paying are excessive compared to those in other retirement plans. While the professor has been taken to task for the accuracy of his data and the manner in which he acted, the reaction shouldn’t divert attention from the fact that unnecessary fees do hinder retirement plan account growth. The DOL stresses the importance of reviewing fees by illustrating the impact they can have over time. According to an example provided on its website, a hypothetical retirement plan participant with 35 years until retirement earning an average of 7% annual growth would end up with 28% less at retirement with a 1% increase in the fees paid.
That sensitivity to fees is why it is important, and a fiduciary requirement, that plan sponsors make certain that fees are reasonable in light of the services rendered. One example of a “premium” service that could be used to justify higher fees is participant education. The question, though, is whether or not education is worth it.
Plan sponsors are permitted to take a proactive approach through their own efforts or through use of service providers or advisors to provide plan participant education. The benefit to participants is that it can inform them to make better decisions that ultimately result in better retirement outcomes.
The results of a 2013 study released by the National Institute on Retirement Security (NIRS) found that the collective retirement shortfall in the U.S., is estimated at between $6.8 and $14 trillion, depending on which assets are included. On an individual basis, it found the median retirement account balance for near-retirement households between the ages of 55 to 64 to be only $12,000.
Remember those numbers when considering a second recent study, this one conducted on behalf of Principal Group. The study found that the top recommendation advisors would make to clients for achieving their financial goals is to increase retirement savings. Clearly there is a disconnect between what professional advisors believe participants should be doing and what is actually happening. In fact, the same report from NIRS found that “nearly 45% of all working age households do not own assets in a retirement account.”
One way employers can begin to address the shortfalls is to encourage greater employee participation in company-sponsored plans, to increase contributions to their plan, and to make better, more informed investment decisions. A participant education program can accomplish those goals. Studies from Stanford University, North Carolina State University and TIAA-CREF, and Employee Benefit Research Institute all show evidence that participant education programs have positive outcomes in terms of increased participation, greater contribution rates, and/or retirement outcomes.
If participant education encourages individuals to participate who otherwise might not have, or to increase their contribution rates to achieve financial goals they didn’t previously understand, paying a reasonable fee for those services will be well worth it to both the plan sponsor and the participant. They key considerations for a fiduciary will be determining what constitutes a successful education program and monitoring that program to ensure positive results are being achieved.
FiduciaryNews.com did a series last year that covered participant education programs and is a useful source for understanding the context of a successful one. Fred Reish has also addressed the legal advisability of participant education under ERISA. We have also previously address on the blog education policy statements and the components of a participant education program.