Recently enacted retirement plan disclosure obligations make regulations for plan sponsors and plan service providers more black and white. Sponsors and providers will benefit from the two fee disclosure rules, put in place in 2012, and in particular, the regulations will reduce the number of problems that come up regarding fees.
Business owners that provide retirement packages, like 401K plans, for employees may see these benefits from the fee disclosure rules:
- Being a better employer. Good fiduciaries are good employers. The new regulations should help them become better at both. They will give plan sponsors a clear path towards optimizing their retirement plans from a cost and offering standpoint. This should provide participants with a better investment experience, which should, in turn, make them happier (and better) employees. Don’t be afraid to take some credit for this.
- Better use of company contributions and participant deferrals. No employer wants to see its contributions to a plan not put to cost-effective use, and participants feel the same way about their hard-earned salary deferrals. Under the regulations you will have the opportunity to make all plan dollars work harder.
- Opportunity for “apples to apples” comparison of plan service providers. Many current service provider models do not lend themselves to easy understanding of, much less comparison of, the fees that they charge. Sometimes investment fees, product fees, and fund fees are “bundled,” which can make for a very opaque fee structure. This should change under the new regulations.
- Opportunity to negotiate lower fees and/or added services. Higher expenses don’t necessarily mean better investment returns, and expenses that don’t add corresponding value can significantly reduce investment returns. These costs are most pronounced (on a dollar basis) for those participants–often company owners or upper management–that typically have the highest plan balances.
- Opportunity to consider a new service model. Many current service models are expensive for what they provide. Armed with the information that the regulations require, you will be able to relatively easily consider alternative service models that may provide better value.
- Opportunity to consider offloading the heavy lifting. In addition to managing the information coming to them from plan providers, plan sponsors will need to provide information to plan participants and determine the reasonableness of the fees and service arrangements. How does one determine reasonableness? For a relatively small fee there are capable, independent firms that can provide benchmarking information not only on the plan costs but on the fund fees as well. This can make your job of determining reasonableness much easier and keep time, distractions and mistakes to a minimum.
- Opportunity to get more out of your providers. If your plan service provider is not willing to assist with the “reasonableness” determination as part of the services it provides, you should consider changing to one that does.
- Possible lengthening of the time between full plan reviews. Many experts recommend that plan sponsors conduct a full plan review every three years through an RFP process. These can be expensive, time consuming and distracting. Although the Department of Labor seems to use three years as benchmark, there is no bright line rule on how often a full plan review must be conducted. It seems to make sense to assume, however, that vigorous and thorough annual compliance with the new fee disclosure regulations and the taking of any action that might be indicated by that compliance should effectively counter any argument that some arbitrary maximum period of time between full plan reviews should be imposed.
- Forcing a “process.” The best way to manage risk is to employ a prudent process. Regulators like to see that employers not only have a documented plan review process, but also a documented record of following that process. Whether it is you or a consultant that provides such services, the new regulations are specific enough to enable sponsors to establish and follow a checklist that will help them not only comply, but also have a record of showing what was disclosed and what (if anything) was done in response to what was disclosed.
- Reduced threat of claims and lawsuits. Most employers are unlikely to have to face an employee lawsuit over a retirement plan offering but, participants will now be armed with previously undisclosed information, and the likelihood of more questions (and potentially more lawsuits) is high if the plan sponsor does not meet the “reasonableness” requirement. The key here is to make sure that you properly analyze and determine the reasonableness of the fee and expense information that is disclosed.
If you have any questions about the new regulations or want assistance in coming up with a plan to comply with them, contact Midwest Capital Advisors, LLC at 616-454-9600 or go to their website.
Source: Midwest Capital Advisors Photo: Jane M Sawyer
