The administrative branch of the federal government is behind a recent curious effort by the Department of Labor to cut retirement plan fees. It seems to be a case of “it’s not broke but we’ll fix it anyway and see if it turns out better”. Proponents argue that – all other things remaining the same – lower fees mean larger retirement plan balances at retirement. Government is presumably interested in increasing the level of financial self-reliance of retirees. Opponents argue that there is little evidence that retirement plan fees are directly related to real-life investor results because of life experiences where a personal financial adviser becomes useful. My own primary concern is that the change will hurt small businesses that traditionally have trouble hiring top-quality financial advisers anyway because of their size. Most skilled and experienced financial advisers, for example, do not handle accounts less than, say, $250,000. Some small firms wind up being sold investments in retirement plans by rookie sales representatives. But what they lack in experience these representatives make up for in personal service on their accounts. Now with the fees removed there will be even fewer willing service providers for small businesses that want to start a 401(k) plan.
Today’s Wall Street Journal reports that employers are beginning to react to reduce fees by move to lower cost service providers. An incredible 1 in 3 employers in the WSJ-cited survey indicated that they may change to a lower fee service provider. With this drop in fees is likely to come a decline in the services that were covered by those fees. It would be simply naive to think that investment firms would provide the same services at lower prices. Likewise, there is little reason to believe that the lowest cost retirement plan service providers offer the best value to their clients.
Yet there doesn’t seem to be anything included in the popular discussion about how employers and plan participants will cope in this minimalist support environment. Some have speculated that ‘a la carte‘ financial advisers like me with an investment advisory background but who do not charge investment-based fees will benefit from the change, Professional and regulatory standards allow CPA financial advisers to help clients with their retirement plans without being labeled as investment advisers subject to additional regulation and fees.
So far I don’t sense any increase in market demand for help with 401(k) investments or retirement planning. It could be years before we see any real impact of this minimal fee retirement plan movement.