Top 5 changes to 401(k) market in 2012

Chad Parks founded his company in 1999 with one goal in mind, to make 401(k) plans accessible to small businesses.

As the industry enters 2012, the CEO of The Online 401(k) believes there are five changes afoot in the 401(k) marketplace that will play a pivotal role in the industry moving forward.

Fee disclosure

With the U.S. Department of Labor set to release its final rules on fee disclosure, to both plan sponsors and plan participants, 2012 will be a year of changes for the defined contribution market.

Fee disclosure will focus more attention on 401(k) plans.

“We’ve been beating the drum for 12 years. All we want is fee disclosure. Once people know what they are paying, the market will take care of itself,” Parks said.

For the first time, companies and individuals will know what they are paying for record keeping, administration and advice.

The fee disclosure rules are scheduled for implementation by April 1, unless the DOL grants an industry request for an extension.

Other industry insiders, like the American Society of Pension Professionals & Actuaries (ASPPA) and the Plan Sponsor Council of America, have said the fee disclosure rules will be the critical piece of regulation that comes out in 2012 and that there will be public outcry when people finally realize how much of their retirement earnings are going to pay for hidden fees.

“Participants are not used to seeing this. It will take some time before they understand what this means,” he said.

The other important piece of the fee disclosure issue is benchmarking. Once the fees are revealed, there has to be a way to compare them so that plan sponsors and participants can see what it costs to belong to different size plans.

“It’s a double edged sword: disclosure is good, you can see what they are getting paid, but do you know whether you are getting good value for what you pay? … That’s where benchmarking will become very important,” Parks said.

Parks, who is a member of both ASPPA and the Council of Independent 401k Plan Recordkeepers, said that the council has been discussing benchmarking at length. There isn’t a nonprofit benchmarking platform available, so one must be developed, he said. “What we need is primary data points, at least some basis for comparison.”

That would include number of employees in the plan, assets, hard dollar costs, investment expenses and ancillary expenses, like loans.

The argument against benchmarking is that it doesn’t include special services providers offer, like paper statements, booklets and sit down advice, Parks said. “Are you comparing a Volkswagen and a Cadillac? On the flip side, the concern is that employees will see they have been paying $300 to $500 per quarter and will go into their HR office angry. It creates a windstorm of activity between sponsors, employees and providers. I hope there can be rhyme or reason out of this, not mass panic out of this. That’s the potential negative for fee disclosure.”

He added that the market will eventually straighten out and employees will benefit from it with more competitive rates, which will allow them to put more money in their retirement accounts.

401(k) advice

Parks also predicts that 401(k) advice will be more plentiful in 2012. The Employee Benefits Security Administration issued a new regulation in October that gives smaller companies the opportunity to bundle investment advice as part of their 401(k) and IRA plans. The regulation will allow fiduciary investment advisors to receive compensation from investment vehicles they recommend if the investment they provide is based on a computer model that is certified as unbiased and applies generally to accepted investment theories, or the advisor is compensated on a “level-fee” basis, meaning the fee doesn’t vary based on the investments a participant selects.

The DOL and U.S. Securities and Exchange Commission also are working on competing definitions of fiduciary. The goal is to get more individuals the advice they need so they can save enough for retirement, Parks said.

The downturn in the market and the losses most retirement plans experienced has made it clear that most investors don’t have any idea how to invest their money, and most are unwilling to pay someone for that kind of help. Having access to advice within a plan they are currently enrolled in will make saving for retirement much easier.

Investment models will change

Parks predicts that more 401(k) investment models will include target date funds, which will take into account how much time participants have left until retirement and how much risk they should take at that point in their careers.

Simple, low-cost options will expand

The industry already has seen a trend toward simple, low cost alternatives to past plans. Recently, many large 401(k) plan providers have started offering small business 401(k) plans. This trend will only continue as rules change, making it easier for people to see what fees they are paying to their plan providers.

Individuals will save more

If the industry is successful in fending off Congressional attacks on 401(k) plan tax incentives, the economy improves and workers feel more stable in their jobs, 2012 will be a good year for retirement savings.

Limiting how much people can save in their retirement accounts, as suggested by the budget super committee, would have a negative impact on retirement savings, he said.

“There’s another attack on the only real, true retirement system we have,” Parks said.

He added that if you take away those benefits, small businesses would have no reason to offer retirement plans.


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