April 1 will be a significant date for employers with 401(k) or other retirement plans. This is the deadline for their plan’s service providers to provide written disclosures about services provided, costs charged and their fiduciary status to the retirement plan.
It is a watershed event for the 401(k) plan industry, which is notorious for its lack of transparency around costs and services. For a long time, there has been a trend to bury the plans’ administrative costs within high-expense investment choices or insurance company annuity wrappers with no disclosure on the reimbursements paid to plan providers. As a result, many employers do not know what they are really paying for their retirement plan.
This all changes thanks to the U.S. Department of Labor’s new disclosure rule known as Regulation 408(b)(2). Service providers that must follow this rule include fiduciaries, investment advisers, record keepers and brokers. Simply put, anyone who gets paid in the operation of the 401(k) plan must disclose his or her compensation.
Fiduciaries of retirement plans must evaluate the expenses paid by their plans for services and investments. In fact, it is both a fiduciary breach and a prohibited transaction to allow your plan to pay more than reasonable expenses.
Plan fiduciaries may include the employer’s (also known as “plan sponsor”) retirement plan committee, plan trustee, investment adviser and all individuals exercising discretion in the administration of the plan. While these new rules and disclosures are a good thing, the result is that plan sponsors will face both higher expectations and legal responsibilities.
As game-changing as April 1 promises to be, June 1 could prove even more profound. Starting in June, all plan participants must be told something they probably never knew—how much they pay each quarter for their 401(k) plan. And this is not just in percentages. They must receive quarterly statements showing the dollar amount of plan-related expenses actually charged or deducted from their accounts.
If employers do not take a proactive stance on this issue, problems may ensue. Many participants believe they pay nothing for the services provided for their 401(k).
Remember that this disclosure follows a period in 2008 in which most participants experienced severe investment losses and may not have recovered those losses yet. It is likely there will be a number of concerned participants over these costs.
These concerned employees will likely camp out at their plan sponsor’s door, wanting to know why they are paying so much. If the plan sponsor does not have a good answer to these questions, and without proper communication and education, the perception could evolve that the retirement plan is not attractive and the whole purpose of the benefit plan is diminished.
And it is quite possible that the plan sponsor might not have good answers. Because 401(k) plan costs have been hidden for so long, it is no surprise that costs vary widely from one provider to the next. It is easy in such a system for companies to overpay for their retirement plan since they never get an invoice and the expenses are all taken from the plan assets.
So if you have a plan that is much more expensive than what you think it is, you want to know that ahead of time before the information gets out to your employees.
Make sure you receive cost and service disclosures as soon as possible in advance of the April 1 deadline to give ample review time before the June 1 participant disclosure deadline.
And when you receive the disclosures, you have a duty to review and evaluate them. Is the cost of the plan reasonable in relation to the services being received? Are the services appropriate for the plan? Are they meeting the needs of the fiduciaries and participants? Are there conflicts of interests and, if so, are they being managed properly?
While transparency on costs and services is good, it is up to plan sponsors and fiduciaries to use this information to better serve the participants. Remember, the ultimate goal of a retirement plan is to help employees retire successfully. Reasonable costs, good investment choices, and solid education on how to use these investments are the foundation of a good retirement plan.•
Brent Walker, certified financial planner, is president of WealthPoint Advisors, an Indianapolis-based, fee-only wealth management firm. Views expressed are the writer’s. He can be reached at 818-1040 or [email protected]