While the disclosures to plan participants don't begin until August, HR leaders should be communicating now with employees to make sure they understand that such fees already exist -- even if they haven't been disclosed before. HR leaders should also make sure their staff will be able to understand the disclosures they will receive from service providers -- and that such fees are "fair and reasonable."
When the U.S. Department of Labor chose to require plan administrators and investment companies to disclose the costs associated with 401(k) plans, the prime goal was increased fee transparency.
With two critical fee-disclosure deadlines on tap this year, experts say, employers and human resource professionals should consider two prime strategies: First, make sure to communicate early and often with both service providers and employees in the plans. And, second, it might be smart to get professional expertise in sorting it all out from the get-go.
In February, the DOL released its final rule on disclosure of fees for running defined-contribution plans, mainly in the form of 401(k)s.
On July 1, service providers will have to comply with more transparent disclosures to employers. Sixty days later, on Aug. 31, employers will be required to provide that information to employees, whether they are 401(k) plan participants or not.
The information centers on fees, expenses and investment-fund performance.
Service providers must provide plan sponsors (usually employers) with all the relevant data regarding fees and investment performance. Next, plan sponsors must decipher that data and ensure the providers' charges are "fair and reasonable."
When the August deadline rolls around, that data -- albeit in a much easier to understand format -- must be conveyed by employers/plan sponsors to employees so they can see exactly how their money is being spent and their investments are being handled.
An estimated 72 million participants enrolled in defined-contribution plans will receive this information, according to Jeff Acheson, a partner at Schneider Downs Wealth Management Advisors in Columbus, Ohio.
Some of those participants, he says, will pay no attention, but then, there will be small percentage of "noisy" employees who will have questions and concerns.
"For employers, I would begin with the end in mind," Acheson says. That means trying to determine to what degree participants will pay attention to the disclosures, noting that many employees probably are not aware they are paying these fees -- and some are not going to happy to discover that they are.
"Launch a strong communications effort very soon or you could have some problems," he says. "Participants may think the fees are new, for example, but they really are not. They just haven't always been this disclosed before."
Acheson offers this scenario: One participant gets home from work and opens up their 401(k) statement and then a spouse (different employer) does the same. They compare data, and one is paying twice as much as the other with basically the same 401(k) balances.
That could be problematic, and would require a good explanation, he says.
Chicago-based Barb Hogg, who leads Aon Hewitt's retirement communication practice, says the fee-disclosure regulations are very good for participants, but without a strong -- and early -- communications plan, most workers will not understand why they are receiving such information or what it means.
"It's very important to set the stage for this as soon as possible," Hogg says.
Employers need to help participants understand that there are fees associated with their retirement programs and that investment providers will becoming more transparent about those fees and investment performance.
"Employers also can use this to provide reassurances, to tell people, 'the good news is disclosure has arrived and here are the steps we are taking to ensure the fees are reasonable,' " she says.
In fact, Hogg says, the disclosure-rule rollout offers a tremendous chance for employers to discuss investment options with current participants, and perhaps even use the disclosure communications as a way to entice employees to either start a 401(k) or even increase their contribution rate.
"With the focus on fee disclosures, other aspects of a 401(k) plan may get lost," she says. "The bigger picture is [to] balance the fee-disclosure information with asset-allocation information and the tools provided for people to manage their accounts.
"Employers can turn it into a teaching moment," Hogg says. "It's a great opportunity. There is nothing wrong with laying something on top of the disclosure document."
Of course, as HR leaders get the communications engine revved, they should also be preparing staff to be able to decipher the fee-disclosure information that will be provided by the plan sponsors by July 1.
That might require some assistance, say legal experts.
According to Jewell Lim Esposito, a Fairfax, Va.-based partner who specializes in employee benefits and tax law at Constangy, Brooks & Smith, companies already are beginning to receive these disclosures from their service providers.
"The problem is, they don't know how to make sense of all the data without some outside help," she says.
Lim Esposito says employers are very reliant on the disclosures provided by their service providers and, although employers are not in the business of writing these disclosures, they definitely need to understand them.
That must occur before employers can provide their own accurate disclosures to employee participants.
"The obligation will continue to remain on the employer overall, but to be real, who is the person back at the home office? Typically it is the HR person, and they are so saddled with other things to manage, it could be difficult for them," she says.
Lim Esposito says some HR professionals will not know the difference between basis points, for example, or even what a basis point means. Her advice is to seek outside help through an independent, third-party adviser.
"This applies to both the small employer with 10 or fewer to those with 50,000-plus employees," she says. "We often see HR people who not experienced enough to analyze the fees involved in defined-contribution plans."
Two attorneys at Philadelphia-based Morgan Lewis -- Michael Richman, counsel in the employee-benefits practice, and Don Myers, a partner in the employee-benefits practice -- say plan sponsors are just beginning to think about dealing with the information they will be receiving come July 1.
Richman and Myers recommend HR leaders should plan to communicate with service providers as soon as possible, reminding them about the deadline; and create a punch list that includes who they expect to receive the information from, including fiduciaries, advisers, recordkeepers, etc.
"We are seeing clients waiting for the service plan communications, and we are also seeing some plans starting to send letters to service providers, letting them know it is time to act," Myers says. "Some of the larger companies have already begun circulating forms to service providers. They have been a bit more organized since the disclosure rule was finalized."
As the information trickles in, plan sponsors need to have a system in place to compare the data to the DOL's regulations to ensure they are getting all of the data they need.
"If not, they should go back and ask again," Richman says.
At that point, plan fiduciaries/plan sponsors must have a process in place to review the fee data and determine whether the services and the compensation being paid are "fair and reasonable." If the plan fiduciary decides the fees are not reasonable, he or she must take some action, such as looking for another service provider or renegotiating the current contract.
Unfortunately, Richman says, the DOL has not be very clear about defining what "fair and reasonable" means, so he advises employers to benchmark other firms and service providers.
Ultimately, Acheson says, the fee-disclosure regulation will be a game changer for fees.
"It will shed real daylight and be the great antiseptic that can help clean up a lot of issues within the defined-contribution-fee arena," he says. "People deserve to know what they are paying, but the devil is in the details."