A funny thing happened on the way to discussing the question “Will 2012 be the ‘Year of Fiduciary’?” (FiduciaryNews.com, January 4, 2012). While industry veterans argued both sides of the question, they did agree on one thing: small 401(k) plan sponsors will likely be in for a surprise of the fourth kind.
(If you remember "Close Encounters of the Third Kind" then you know anything of the fourth kind cannot be good, especially when it involves probes and, well, you get the idea…)
Here’s the problem for far too many small 401(k) plan sponsors: They believe they can safely hide behind the veil of ignorance when it comes to fees, conflicts-of-interest and, ultimately, the fiduciary duty they owe their employees. For some of these plan sponsors, they feel their liability is limited by the fact that they own most of the assets in their company’s plan. For others, they’ve let the value of their friendships with their service providers prevent them from asking awkward questions. Finally, for the rest, they simply don’t have the time, experience or resources to find the right questions to ask.
All this ends come April 1 when the DOL’s new Mutual Fund Performance and Fee Disclosure Rule becomes effective. No more will plan sponsors have the luxury to disregard the fees behind the curtain – because the curtain will have been lifted. And just like those travelers on the Yellow Brick Road, plan sponsors will discover they’ve always had the brains to understand fees, the courage to question conflicts-of-interest and the heart to care for their employees. If not, don’t be surprised if those same employees click their collective heels three times until their Fairy God-Class-Action-Attorney appears.
Unfortunately, the pain of this new-found will be most acute for small 401(k) plan sponsors. Without full-time HR departments, they’ve had to take on the burden of managing their company plan all by themselves. As the new fee disclosure reveals the layers of fees in those “low cost” group annuity plans so popular with this demographic, small 401(k) plan sponsors will suddenly discover the true onus of their charge. They might not have thought they were buying oil filters, and the “pay-me-now-or-pay-me-later” reality of their decision also never occurred to them as they bought from a no-doubt slick salesman.
But all is not lost. Full fee disclosure has been a clarion cry of fiduciary advocates for many years. It represents a welcomed and long-awaited change, as well as an opportunity for service providers, plan sponsors and employees alike. For service providers, it will finally level the playing field. For plan sponsors, it has the potential to reduce their personal fiduciary liability by making fees and conflicts-of-interest more transparent. Finally, for 401(k) investors, it will provide information in (hopefully) a plain-English format that will help them to avoid making the same tried and true investment decision errors past reporting has encouraged them to make.
In the end, it remains up to the 401(k) plan sponsor to ensure the intent of this new rule is implemented in a manner that extracts the most important information from service providers and can best help employees. Come Spring thaw, all 401(k) plan sponsors – and especially those of smaller 401(k) plans – will learn they can run but they cannot hide.
So, let us all welcome in the New Year. 2012 is destined to be the Year the Fiduciary finally gets it. And by “gets it,” think of the fourth kind of close encounter.