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How Mayor Bloomberg & the Starbucks Effect Could Rescue your Retirement

A new working paper published by the National Bureau of Economic Analysis analyzed the purchasing behavior of Starbucks devotees in NYC after the city's new calorie-posting law went into effect in 2008. Stanford University researchers Bryan Bollinger, Phillip Leslie and Alan Sorensen found that the average calories per transaction fell 6 percent since calorie counts started being plastered on Starbucks food. Interestingly, the researchers found that folks with a history of ordering high calorie food reduced their calories per purchase by 26 percent after the disclosure started. (It costs $5, or about the cost of one Venti White Chocolate Mocha double-shot expresso to download the full paper, Calorie Posting in Chain Restaurants.)

The 401(k) Connection Calorie disclosure was a pet project of New York City Mayor Michael Bloomberg. He understood that if you make information available, you give your constituents the ability to make better decisions for themselves that can improve their health. That's good for the constituents, and of course, good for the city if it also reduces the city's health care outlays.

Offer the same clear disclosure of 401(k) fees and you give Americans the opportunity to make informed decisions that will play a large role in their retirement security. As the GAO reported in a 401(k) fee study (opens a PDF) paying 1.5 percent a year in fees rather than 0.50 percent, reduces a 401(k) balance by 17 percent over a 20-year period. Who's got that sort of money to waste?

But right now, many 401(k) plan participants have no clue what their plan charges for the underlying funds and administrative costs. What disclosure exists is buried in mind-numbing documents. If 401(k)s were instead forced to post their calorie count (fees) in an easy-to-read format, it stands to reason -- as evidenced by the Starbucks data -- that more people just might choose to make more calorie/fee conscious choices.

Will Congress Wake up and Smell the Coffee? Last June the House Committee on Education & Labor passed the 401(k) Fair Disclosure and Pension Security Act that would mandate fee disclosure, and also would require 401(k) plans to offer one low-cost index fund among its menu of investment options. Like much legislation it stalled out as the health care debate consumed much of the oxygen on the Hill last year.

You'd think Congress would be quick to get this passed in 2010. It's not every day you have legislation that actually helps Americans without adding a penny to the federal deficit. But it will be interesting to see what, if anything comes out of Washington this year. (The Department of Labor is also looking at fee disclosure and could enact change through some regulatory changes.)

Keep an eye on the Index Fund provision
The index fund requirement is likely to be a battleground issue for the powerful financial services industry. No surprise, Wall Street thinks it's a lousy idea, for the simple reason that what's good for your retirement (low fees) is obviously bad for their bottom lines. In a recent online poll, just nine percent of stockbrokers said adding a low-cost index fund would be a helpful 401(k) reform. And last July the head of the Investment Company Institute, the mutual fund industry's trade association, asserted that the bill "would distort a vibrant competitive market and would bring government into the task of picking investment options for plans."

Please. What is vibrant and competitive about the fact that 401(k) participants have no choice in the funds offered inside their plans, and can't even easily assess the fees on what is offered? Besides, the bill doesn't mandate that 401(k) plans only offer index funds, nor does it force participants to funnel their contributions into the index fund. It simply requires plan sponsors-- which by the way are supposed to operate the plan for the sole benefit of participants -- to offer an index fund. Offer. Choice. Put it on the menu, show its calorie count and then let Americans decide for themselves. If Washington has any spine about wanting to help Americans shore up their retirement security, 401(k) fee disclosure, and the index fund option, is a good start.

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