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

See all articles by Dominique C. Badoer

Dominique C. Badoer

University of Illinois at Chicago - Department of Finance

Charlie Costello

Upstart Network Inc.

Christopher M. James

University of Florida - Department of Finance, Insurance and Real Estate

Date Written: January 26, 2019

Abstract

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

Badoer, Dominique C. and Costello, Charlie and James, Christopher M., I Can See Clearly Now: The Impact of Disclosure Requirements on 401(k) Fees (January 26, 2019). Available at SSRN: https://ssrn.com/abstract=3093073 or http://dx.doi.org/10.2139/ssrn.3093073

Dominique C. Badoer (Contact Author)

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States

Charlie Costello

Upstart Network Inc.

P.O. Box 1503
San Carlos, CA 94070
United States

Christopher M. James

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611-7168
United States
352-392-3486 (Phone)
352-392-0301 (Fax)

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