The Aug. 30 retirement plan participant fee disclosure deadline will come and go with nary a blip on the radar screen, but come Nov. 14, when plan sponsors must release their first quarterly update, the phones could start ringing off the hook.
The disclosures that are due by Thursday will only add a couple of columns to a plan participant’s usual disclosure documents, but the Nov. 14 deadline will give them actual dollars and cents that they’ve spent on fees, said Dan Weeks, founder, COO and executive vice president of plan sponsor solutions for San Diego-based BrightScope.
The problem with the participant-level fee disclosure is that “nothing in the regulation forces anyone to put anything in context for the participants,” he said. The first disclosure plan participants receive will look much like the prospectuses they now receive in the mail so they will “go over their heads.”
Big plan sponsors, who did their fee disclosure work proactively, have been surprised because they haven’t received a lot of calls about them, Weeks said. “But it isn’t personal yet. It becomes personal with the quarterly statement. They could find out they paid as much in fees as they got in return for their funds.”
A recent report by AARP showed that the majority of people don’t believe they are paying fees on their 401(k) plans. “That’s where it gets personal. Right now, it is too much like a prospectus update,” Weeks said.
BrightScope’s founders believe transparency in the industry was much needed. The whole premise of the company was to help people compare their financial advisors and their retirement plans.
People can go on the BrightScope website, for free, and upload their actual annual fee disclosure document. They can then compare those fees to the fees of other plans their size in a handy, color-coded system that also allows them to compare their plan fees against other rated plans. BrightScope's site already includes fee estimates from most major companies. It updates its fee estimates based on the actual figures that clients upload into the system.
“I think plan sponsors might assume that fee disclosure is not the issue they thought it was because what is happening in the short-term is not interesting,” Weeks said. “The quarterly is where it gets interesting.”
Laurie Nordquist, executive vice president and director of Wells Fargo’s Institutional Retirement business, agreed with Weeks that participant disclosure has been a bit of a non-event. The company has seen very little increase in the volume of calls in the call center.
“We did see a spike when we sent out a notice to all employees who were not participating in the plan,” she said.
Instead of just sending out fee disclosures, Wells Fargo added a message directed to employees who are not participating in their retirement plan letting them know what they are missing out on, including an employer match, which is free money to them.
“We did see an increase in calls from those employees and we were encouraged by that,” Nordquist said.
Nordquist believes that companies that are not taking advantage of the fee disclosure mailing to try and get employees to participate or participate more are missing out on a real opportunity.
Participants are notorious for receiving prospectus mailings and putting them directly into the trash, without reading them. If fee disclosures look like a prospectus, they won’t be read, she said.
Wells Fargo, like most large retirement plan providers, did all the heavy lifting for its plan sponsor clients when it came to participant fee disclosure.
Wells Fargo’s quarterly statement will go out in October.
“We’re not anticipating much of a spike in October, but we will certainly be ready for it when the calls come in,” Nordquist said.
Guardian Life Insurance also believes that both the 408(b)(2) and participant-level fee disclosures have been uneventful.
Jason Frain, vice president of 401(k) product management and development for Guardian Life Insurance, believes that part of the reason too much hasn’t happened with plan sponsors regarding the 408(b)(2) regulations is because they have been really focused on getting out their Aug. 30 participant-level disclosures. Once they get through this month’s disclosure and the Nov. 14, disclosure, then they will begin the long road of benchmarking their plan provider’s fees to see if they are paying too much or just enough for the services being provided.
“Down the line, we will see a broader review of plans, where they are going out and evaluating their fees and doing benchmarking. The participant-level disclosures haven’t heated up yet. Most haven’t seen them yet, but there has not been a huge uptick in calls or questions at this point,” Frain said.
He added that when participants get their quarterly statements, that will be the thing that opens their eyes for the first time. Guardian historically has included fee disclosures on its statements, but now they will be more clear and transparent and in a format that is easier to understand.
“We’re likely to see an additional volume of questions from participants in that time frame,” he said. That’s why Guardian was proactive and built a fee disclosure microsite to help participants understand who the people are that are involved in their 401(k) plans and what their plan fees are paying for.
“I think [fee disclosure] is a good thing. Anytime plan sponsors/participants can get a better understanding of what they are being paid, I think it is good. What is most important though is that plan sponsors and plan participants realize what services or value they are receiving for those fees,” Frain said. “As plans do ultimately go out to benchmark or go out to bid, they have to understand what is being delivered to them today. Not all solutions out there are on an apples to apples basis.”
The one problem with fee disclosure statements is that they don’t compensate for higher fees translating into higher returns. They are just bottom line fees, said Weeks. The average person doesn’t understand bonds versus stock or active vs. index. Because index funds have lower fees, there will be a shift to those because fees look like taxes, he added.
“What they don’t know is that this tax is well worth it,” Weeks said.
For more information on fee disclosure, read: