New 401(k) rules require hard questions
The Department of Labor (DOL) noticed that the majority of 401(k) plan sponsors (Employers) are “not well-informed” regarding the fees they’re paying for their retirement plan. It’s also no surprise that the majority of plan participants are under the impression that their plan is free! According to a February, 2011 independent survey released by AARP, 71% of Americans are not aware that they pay fees to their 401(k) Plan Service Provider; and almost one-third (32%) report that they do not feel knowledgeable about the impact that fees have on their retirement savings. The DOL has issued a new regulation [ERISA section 408(b)(2)] Expense Disclosure that will take effect in April and May, 2012 for plan sponsors and their plan participants, respectively, requiring the Retirement Services Industry to fully disclosure all fees and expenses associated with 401(k) plans. To comply with the new regulation, 401(k) plan administrators, brokerage houses, investment firms, etc., will now have to create disclosures following user-friendly, uniform guidelines. The disclosures will tell a clear story of both direct and indirect fees and expenses.
This is a monumental decision and most Advisors think it’s long overdue.
The disclosure requirements have sent 401(k) Service providers scrambling to comply. Some are opposed to the new regulation since it will expose the sometimes high, sometimes unreasonable, fees associated with their products and services.
Plan sponsors, in turn, should be concerned because, starting in 2012, they might have to explain those expenses (Administration, participant, fund expense ratio, broker/advisor) to plan participants and justify their service provider and fund choices. Plan sponsors who don’t understand the fees associated with their plan may be facing some awkward, difficult conversations with their employees.
Plan sponsors can be prepared for these conversations by requesting a written explanation of their fees from their present service provider. They should be ready to ask some hard questions; here are a few questions to get them started:
- What are the total fees and expenses applicable to my companies’ 401(k) plan?
- What have you accomplished in our plan for the compensation you were paid?
- Do these total fees and expenses include any indirect compensation received by your firm for selling/administering my plan? If not, why aren’t they included?
- How much is the indirect compensation and how frequently is it paid?
- Why haven’t we been made aware of these fees before now?
It is important that plan sponsors ask these questions; ask for clear explanations of each fee; understand how each fee is paid and to whom it is paid.
About the Author
Robert Swails is a Vice President at WGA and a Qualified Retirement Plan (401k) expert within the Employee Benefits Group.