Changing the Game
How to prepare for the new fee disclosure rules and quell participant concerns
Interviewed by Leslie Stevens-Huffman
Beginning in May, approximately 60 million people will discover some new information in their 401(k) statements. Not only will they find out whether they made or lost money, for the first time, many will see how much they paid in plan fees and expenses. Of course, plan sponsors not only have to comply with the new regulations and meet their fiduciary responsibilities, but they also have to justify the plan's administrative costs to participants, who have been resorting to class action lawsuits after enduring more than a decade of lackluster returns. "Plan sponsors may face a tsunami of anger and questions from participants unless they get out in front of this change," says Kyle Pifher, principal, retirement plan services for Findley Davies. "Otherwise, some participants may be shocked to discover how much they're paying in plan fees." Smart Business spoke with Pifher about the impact of the new disclosure regulations and why plan sponsors need to take proactive steps to address employee concerns.
What are the new mandates?
There are two critical components in the new regulations. First, beginning in April 2012, third party providers and recordkeepers must disclose a detailed summary of all fees and charges that exceed $1,000 to plan sponsors as mandated by 408(b) (2). Then starting May 31, individual participants will see their portion of those fees on their plan statements as mandated by ERISA Section 404(a)(5).
Why did the DOL propose new regulations?
The need for greater transparency became apparent following the market correction in 2008, when participants openly questioned fees as their account balances plummeted. Essentially, there was no consistency in the way fees were assessed or disclosed, making it difficult for plan sponsors to uphold their fiduciary responsibilities, which include prudent selection of service providers, monitoring fees and ensuring that reasonable compensation is paid for services to maintain the plan. In other words, the DOL is simply responding to the long-standing need to disclose a detailed break-out of fees and expenses that were often consolidated into a single charge or hidden in the fine print.
How do the changes shift or alter the duties and responsibilities of plan sponsors?
The fiduciary responsibilities of plan sponsors are essentially the same, but the new laws and detailed fee disclosures will certainly illuminate their rigor and performance. For example, participants may wonder whether the fees are reasonable given the plan's risk and returns, since fiduciaries have an obligation to act prudently and solely in the interest of participants by monitoring plan fees and ensuring that the charges aren't excessive. So, sponsors will need to show how they benchmark third party fees and be prepared to explain their selection and oversight methodology. Participants may also question their investment choices.
What are the benefits for plan sponsors and the possible drawbacks or unintended consequences?
Certainly the increased transparency will help sponsors benchmark and compare fees across companies and industries and negotiate every charge, which could ultimately lower the total cost of the plan. The good news is that the fee disclosures may encourage participants to read their statements and manage their investments, because optimizing retirement plan returns benefits everyone in the organization. On the negative side, this could create animosity toward the employer if fees have not been disclosed and employees feel as if they have been left in the dark. And we're seeing more class action lawsuits from disenchanted participants, who are protected by the prudent man rule, which states that trustees must manage another's money using skill and care.
How are companies using this new information to assess service provider fees?
We're seeing more companies engage an outside consultant to conduct plan reviews and side-by-side fee comparisons along with a greater desire to benchmark current fees against industry standards. As a result, more companies are soliciting bids and changing providers, especially if they feel that plan providers aren't charging reasonable fees or delivering value.
How can plan sponsors head off problems before they occur?
Follow these steps to head off problems before they occur.
- Review third party fees and expenses: Know where you stand before participants receive their May or June statements, so you can anticipate their concerns and negotiate fee reductions or even change providers. It's also prudent to review your plan's investment choices to see if they are aligned with your employees' risk tolerance and desired rate of return based upon the current needs and demographics of your employee population.
- Communicate transparently and proactively: Fully disclose all service fees using language and terms that resonate with your employee base. Describe the services they provide and how your current fees compare to those charged by other providers.
- Provide education: Offer educational meetings, brochures and call center support, so employees understand the role of plan providers and how they develop their fees. In fact, this is the perfect time to review retirement plan fundamentals and the current investment options; because your 401(k) isn't a benefit unless it actually helps your employees meet their retirement goals.
2012 Smart Business Network Inc. Reprinted from the February 2012 issue of Smart Business Columbus