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New 401(k) Fee-Transparency Rules Demand Attention

Beginning this month, new transparency rules on 401(k) fees go into effect, and experts agree that HR leaders need to pay close attention to the other changes coming later this summer and beyond.

Wednesday, July 11, 2012
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Have plan officials been asleep at the wheel when it comes to assessing the fairness of fees charged participants in their 401(k) plans?

Not exactly, but there has been plenty of confusion -- some of it cited in an April 2012 report from the U.S. Government Accountability Office. These are issues the Labor Department hopes to address with the 401(k) transparency rules it began to enforce on July 1.

July was the deadline for providers to disclose clearer and more detailed fee information to plan sponsors. Another, more challenging deadline -- from an HR perspective -- is approaching on August 30, 2012.

This time, it will be up to plan officials -- the very same committee members or individuals who typically sign off on 5500 forms -- to supply more detailed and specific information to plan participants regarding the fees they're paying for their 401(k) plan management and administration.

It's no secret that plan participants are often in the dark when it comes to the plan fees they often pay out of their plan assets -- with many, if not most, participants believing they pay no fees at all.

The AARP reported last year on a survey of more than 800 plan participants at the end of 2010. Seventy-one percent of those polled believed that they did not pay fees on their 401(k)s.

Newer information shows that a smattering of plan sponsors face a disconnect as well.

 "In addition to sponsors who said their plans paid recordkeeping and administrative fees, sponsors of 9 percent of plans did not know if they or their participants paid for these services," the GAO reported last April, citing a survey of 1,000 plan officials polled regarding the 2009 plan year.

The GAO said plan sponsors often do not understand complex revenue-sharing arrangements between providers and their impact on fees. "One industry expert explained that plan sponsors are commonly not aware of fees or fee arrangements disclosed outside of the expense ratio," the GAO report stated.

Experts say that new provider disclosures should make things easier, though there will be new plan-sponsor obligations, as well.

"It's a time when everybody has to show their cards," says Dave Leali, a wealth adviser with United Capital's South Florida region.

The good news, he says, is that, given the information providers have had to supply already to comply with the Dept. of Labor's July 1 deadline, "it's much easier [for plan sponsors and their advisors] to compare" one plan against another.

"We work with John Hancock on a few plans, and we've seen their disclosures to plan sponsors in the last week or so," he says.

Now he can tell how much of the 100-basis point fee Hancock has charged for one large-cap value fund is "going to the actual mutual fund firm [managing the fund] and how much is going to Hancock," he says.

And that suggests a more competitive landscape is in the offing.

There should be a greater opportunity for plan sponsors and their advisers to shop their 401(k) plans because they have a better grasp of what they are paying to whom. As Leali explains, "If I know that John Hancock [or some other administrator] is taking a larger portion of the fees for one of a lifestyle or lifecycle fund where the majority of our participants invest, I can go to a different plan provider and probably come up with an overall cheaper plan."

That's the good news.

The bigger challenges for plan officials, however, are coming fast and furious as they work to develop the proper fee disclosures while trying to anticipate how participants will respond when they start seeing disclosures of fees many employees have been paying all along as a share of their plan assets -- often without knowing it.

One likely outcome, sources say, is "sticker shock" and the need to focus on how plan participants will respond to two new disclosures required by Aug. 30 and by the time participants will receive their third-quarter 401(k) statements later this fall.

Brad Campbell, a former assistant secretary of labor for employee benefits and head of the Employee Benefits Security Administration under Pres. George W. Bush who is now counsel at law firm Drinker Biddle in Washington, says plan sponsors will need to offer participants a number of components in the coming months.

The Labor Department, he says, is calling for plan sponsors to provide plan participants with a comparative chart by that Aug. 30 date, which describes the designated investment options in the plan, their track history over 1-year, 5-year and 10-year periods or since inception, as well an expense ratio and a layman's rendering of the fees participants are paying in dollars per thousand invested.

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"The DOL determined that many participants did not understand expense ratios alone, so these were paired with the dollar illustration in the final regulation," says Campbell. He also says the DOL's intent was for sponsors to assemble all the basic information participants need to make informed investment decisions in one place.

And, by the time participants receive their third-quarter 2012 plan statements, the statements should reflect any quarterly administrative expense expenses actually charged to the participants' accounts, including legal, accounting and recordkeeping expenses.

For some plans, this will need to be reflected as a dollar amount, says Campbell.

"Some statements might say, for instance, 'You paid $42 last quarter for administrative expenses,' " he says. In other cases, statements will note that there were expenses, but they are not broken out because they are paid out of the operating costs of the investment option. Some plans might have both situations occurring at once.

Campbell also says that different combinations of service and fee arrangements -- such as whether the plan uses one provider or several different vendors -- will present different disclosure issues for the plan to consider, and can make compliance more difficult.

"The plan administrator needs to understand how their expenses are being paid, whether directly or through the investments themselves," he says.

The experts also offer a few additional tips for plan officials dealing with the fee-transparency deadlines, including:

Don't rely on snail mail alone to let participants know about the changes relating to disclosure. Work with your advisor or other plan providers to develop a strategy to complete the disclosure process.

For the plans Leali manages, he and his colleagues will be offering both face-to-face and webinar meetings in the coming weeks.

* Make sure you and your providers are equipped to handle the calls that may emerge once plan participants receive third-quarter statements showing expenses that were not disclosed for the second quarter.

* And finally, don't underestimate the importance of the fee disclosures in question.

They represent "a new fiduciary duty of the plan administrator -- the [same] plan official or committee which signs off on the 5500 form," says Campbell. "The concern I have is that there is a group of plan sponsors [who may not be] aware of the seriousness of this obligation."

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