I Can See Clearly Now: The Impact of Disclosure Requirements on 401(k) Fees
41 Pages Posted: 2 Jan 2018 Last revised: 27 Jan 2019
Date Written: January 26, 2019
In 2012, the Department of Labor (DOL) imposed new disclosure requirements concerning the indirect fees earned by 401(k) retirement plan service providers through revenue sharing agreements with mutual funds. This paper examines the impact of these fee disclosure requirements on the level and structure of fees paid by retirement plans. We argue that when revenue sharing is not disclosed in a prominent way, revenue sharing provides a way for service providers to price discriminate between larger, better informed plan sponsors and smaller less sophisticated sponsors. Consistent with this argument, we find that disclosure requirements designed to increase the transparency of indirect fees are associated with a substitution of direct fees for indirect fees and a reduction in total fees paid by smaller retirement plans. We also find that mutual fund providers responded to increased revenue sharing disclosure requirements by introducing retirement fund share classes with lower 12b-1 fees. Finally, we find that disclosure changes are associated with an increase in low-cost mutual funds offered as investment options by small plans.
Keywords: Disclosure Rules, Compensation, 401(k) Plans
JEL Classification: G18, G23, G28
Suggested Citation: Suggested Citation