If you're a retirement plan sponsor, you probably had July 1circled on your calendar.

July 1 was the deadline for fee disclosure, a long talked-aboutregulation from the Department of Labor that requires certainservice providers of ERISA-covered plans to provide sponsors withclear disclosure of the compensation they, their affiliates andtheir subcontractors get from plan assets.

If they haven't complied by now, plan fiduciaries must takeaction, which might mean notifying DOL of the service provider'snoncompliance. Service providers need to inform sponsors of thedirect and indirect fees they're paying for services,administration and investment management. 

Many media outlets and researchers already have pegged this as aday of reckoning for plan sponsors—and their participants—who wereblindsided by high-cost fees that drain plan assets. 

(One Forbes contributor called 401(k)s, “one of the biggest skimgames in financial services.”)

The latest study of note was a white paper from research firmDemos, which found “an 'ordinary' American household will pay, onaverage, nearly $155,000 over the course of their lifetime ineffective total fees.”

To help participants, senior advocate group AARP launched aconsumer tool with BrightScope that helps account holders (71percent of whom don't know they pay 401(k) fees) figure out theirfees and compare them to the average for a low-cost 401(k)investor.

The process of disclosure might lead to user protests, but a fewexperts are telling plan sponsors to put away their pitchforks.While many sponsors might not have known what they were paying forbefore, the new transparent system will empower them as consumersto better examine the value they're buying. And cheaper is notnecessarily better.

Kevin Crain, head of institutional retirement and benefitservices at Bank of America Merrill Lynch, says disclosurepreparations were a long time coming, but mostly among midsize tolarger 401(k) plans. Now, that level of understanding will spreadacross plans of all sizes, and that's a good thing.

“I don't see [fee disclosure] as bad, if what is articulatedalongside of it is value for cost,” Crain said at the Society forHuman Resource Management's annual conference in Atlanta in June.“Just because fees are disclosed in a different way than they werebefore, this doesn't mean they're bad. What [plan sponsors] willhave to get help with is the translation about the value that hasbeen given to them. Do they clearly understand how their plans areperforming? Financial wellness, participant utilization,participant satisfaction—those will all be important concepts toequate a value to what they're getting.”

Not all plans created equal

When a Moody's analyst predicted in February that fee disclosurewould be “credit negative” for higher-cost asset managers, he notedproviders in service smaller markets would most likely feel thegreatest pressure under new regulations.

That's because small plans tend to include “higher-fee shareclasses of mutual funds to generate revenue for sharing with planservice providers, compared with large plans, whose corporatesponsors have the wherewithal to subsidize plan costs.”

“Typically if you work for a small employer with a smallretirement plan, you pay more. And if you work for a big companywith lots of assets from the retirement plan, you pay less. That'show the math works in terms of making those plans sustainable giventhe assets under management,” says Laura Lutton, editorial directorfor Morningstar's Fund Research group.

Morningstar provides comprehensive data and research oninvestment offerings.

Lutton says certain fund companies target smaller companies andhave higher fees. Then, there are those firms that are hugerecordkeepers and tend to have bigger plans and cheaper funds. Thetype of plan someone is in—and how it's paid for—usually depends ontheir employer. A plan sponsor might decide to split the cost ofthe plan with participants, or let them bear the whole cost.

“I think historically it's been difficult as a participant in aretirement plan to know if you're getting a good deal or notbecause the pricing is so inconsistent from their retirement planversus their neighbor's retirement plan. It depends on who you workfor, what kind of yield the retirement plan has negotiated andwhether the firm pays some of those expenses on behalf ofemployees.”

Ultimately when an employee opens his quarterly statement thisfall, there's a reasonable expectation that participant will pushfor lower fees, Lutton says, “but it's a lot easier for the plansponsor to negotiate at the outset and make a better informeddecision about what's a reasonable cost to pay given thecircumstances of the plan.”

Before participants go running to benchmark what they're payingin fees, it would be wise for a plan sponsor to give participantsan idea of where their 401(k) ranks against others like it.

“The average equity mutual fund charges expenses of 1.3 percentto 1.5 percent, while many 401(k) plans have much lower fees due toscale in the size of the plan and the use of low-cost index fundsin the plan. When disclosing account fees, offer the industryaverage as a side-by-side comparison to provide some context foremployees so they can see the advantages of investing in theircompany plan,” say planners at Financial Finesse, a retirementeducation company that works with plan sponsors.

What about 'rip-off' plans?

“Historically before the fee disclosure rules, the set ofproviders [that] the client least understood around fees—butthought they really didn't need to—were fully bundled where theywere not only giving administrative services for someone, but mostof the investments were also with that company,” Crain said.

Crain explained even when BofA Merrill Lynch used to be justMerrill Lynch, it was a recordkeeping service that had investmentmanagement, but over the last few years, they've gotten out ofinvestments.

“Our feeling was [it's safer] for a plan sponsor in itsfiduciary position to say to them, you have completely openinvestment architecture.”

The ones well positioned in the wake of fee disclosure are thefirms that say, 'I do administrative service, my fees are totallyclear and transparent to a client and it has open investmentarchitecture; you can choose your menu and design your menu in anywhich way you pay for it,' Crain said.

“The ones that are still needing to do some work are the stillvery traditionally bundled providers that had investments as partof their equation. Even with those, they're finding they have toopen up their architecture to more outside-type funds just to becompetitive in the market, and I think it's pushing them to a newgeneration of their business.”