Backlash over 401(k) fees could be brewing

(Photo credit: pakorn) (Photo credit: pakorn)

Despite numerous stories and hearings on the topic, new fee disclosure regulations in the 401(k) retirement plan system could cause some angst among plan sponsors and plan participants.

There are two sets of fee disclosure regulations that are expected to be finalized in Spring 2012. One relates to information investment companies provide to their plan sponsor clients and the other is the fee disclosures plan sponsors must give to their plan participants.

Some companies, like The Principal, began working through the regulations the moment they were first introduced in 2010. “What we did is start providing focus groups with mockups of how we planned to disclose this information. Then we tested it with plan sponsors and advisors and worked through a third party. None of this information was new. We’ve been providing this information for some time. We just seized the opportunity to change how this information was presented,” said Joni Tibbetts, vice president of retirement and investor services for The Principal.

The company also held webinars with plan sponsors and advisors so they could understand the look and feel of the new disclosures so, when it was presented to them, there would be no surprises, she added.

The Principal rolled out its fee disclosures to new clients this summer and began rolling them out to existing clients Nov. 1.

“One of the things we created was a disclosure landing page where our clients and advisors can find all of this information in one place,” Tibbetts said. It is called the Your Services site, and it provides a macro view of the plan sponsor’s retirement plan services from The Principal. It also shows descriptions of each service and whether or not the service is active, helps plan sponsors manage their fiduciary responsibilities by identifying the services they receive from The Principal and includes a printable summary of services report specific to their services from The Principal.

“We tested this information all along in the process, so we haven’t had a huge reaction since we released it last week,” Tibbetts said. “A lot of our advisors are comfortable with our new format. It was always available but now it is in a new format. It has been kind of anticlimactic because we have been having a lot of training sessions about understanding what the regulation is and how The Principal is meeting this disclosure.”

Companies like The Principal now need to disclose recordkeeping fees separately from all other fee disclosures. They also must detail indirect compensation, such as revenue sharing and compensation to advisors, attorneys and trusts. All of these come out of plan assets.

That information is then placed in the hands of plan sponsors who must then communicate the fees to their plan participants.

“Plan sponsors aren’t going to be prepared for the time and effort it is going to take them to reevaluate their plan fees. They will be handed a box of information or a significant set of information they’ve never had before and, as fiduciaries, they have to evaluate that,” said David Wray, president of the Plan Sponsor Council of America.

Plan participants won’t be happy either. “A lot of participants didn’t understand they were paying fees so there will be a process of explanation,” Wray said.

Some companies have been very transparent about the fees they charge, but some have not, he said.

“Credibility is critical in today’s world, especially about finances. I think there’s been a loss of confidence and it is very important that everyone know everything about the programs and that there be no mystery,” Wray said. “I think this will enhance the credibility of the 401(k) system and in cases where fees are really out-of-line I think there will be corrective action taken to bring them down.”

Each plan’s fees will be different because it all depends on how much money is in the plan, the average account balance in the plan, the age of the work force and how many moving parts there are, he said. Offering loans and in-service distributions cost money. The more funds you offer your participants, the more fees you will pay.

“These fee structures are complex. There is no one-size-fits-all correct fee number,” Wray said. “But what will happen is that when we have all of these disclosures, it will be much easier for people to benchmark their particular situation. Plan sponsors will have more information...In the long run it is going to be very positive, but there are going to be transition issues.”

Dennis Ackley of Ackley Associates has been an advocate of better retirement education for the past 20 years. One of the things he has tried to educate his clients about is fees. Particularly when companies say there are no sales fees. What they aren’t telling you is that there are a “hell of a lot of other fees,” he said.

Recent industry surveys show that most plan participants believe their 401(k) is free to them. Most financial advisors believe that participants know they are paying fees. Ackley’s advice to corporate human resources professionals, struggling with fee disclosure, is to be upfront and honest.

“If employee trust is highly valued in your organization and if fees haven’t been communicated clearly, you probably should talk to your CEO soon. Make sure he or she is aware that you are going to be telling employees for the first time that the organization has allowed their money to be taken to pay for various parts of the 401(k) plan,” he said. “Here’s the unpleasant part. Because the organization has allowed employees to believe the 401(k) plan is free, by not telling them that it wasn’t, there may be a backlash. And it may not be so much about the size of the fees, but about why you never told employees about the fees before now.”

Ackley added that plan sponsors should make it clear to participants that the lowest cost plan may not necessarily be the best for their individual needs. “It’s like any purchase, sometimes paying a little more for a fund that better matches your needs could be worth the extra cost,” he said.

The Principal has developed training materials for its plan sponsors to help them convey information about their fees to plan participants.

Even though it isn’t The Principal’s responsibility to help plan sponsors discuss fees with their plan participants, the company believes it is “incumbent on us to provide tools and information to our plan sponsors to make it as easy as possible,” Tibbetts said. The company announced it will roll out a new online participant disclosure resource center in mid-November.

Final fee disclosure rules are set to be released in April and May 2012.

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