Are you Compliant with the New 401(k) Fee Disclosure Rules?

In February 2012, the U.S. Departments of Labor and Treasury finalized new rulings which require additional transparency of fee disclosures to both sponsors and participants of ERISA-covered retirement plans (Sections 408b-2 and 404a-5).  The new rules aim to “reduce the time and cost for fiduciaries to obtain compensation information needed to fulfill their fiduciary duties, discourage harmful conflicts of interest, improve decision-making by fiduciaries about plan services, enhance value for plan participants, and increase the Department of Labor’s ability to redress abuses committed by service providers.”1

* Service Provider-to-Sponsor Disclosure:
The first key component of the new regulations involves service provider-to-sponsor disclosure, and the second component involves sponsor-to-participant disclosure.  Many employers act as the sponsor and/or trustee of their retirement plans, and the intent of the new ruling is to enable them to more readily determine the cost and competitiveness of either new or existing plans.  Historically, this information has been complex, and is often located in different documents, making it difficult to assess.  401(k) mutual fund providers may impose 12-b-1 fees, back-end loads or have “soft dollar” arrangements, and insurance company annuity-based plans usually have sub-account and wrap charges, adding to the confusion.  Many Third Party Administrators share in revenue with partner investment management firms.  Revenue sharing is not inherently bad, but it makes it difficult to determine and categorize overall expenses.  Large plans (generally over 100 participants) may use a Corporate Trustee to provide an asset certification report, which may incur additional flat rate or asset based fees.  Savvy employers may use flexibility in determining plan structure, and can decide if they would like the participants to absorb much of the plan cost, or if they would like more of the costs to be paid by the company.  A younger company may need to have participants absorb costs initially, but as the company grows and becomes more successful they may decide to shift cost away from the participants and pay out of the company coffers.  Thus, two similarly structured plans using the exact same service providers could have dramatically different participant-level expenses.

* Employer-to-Employee Disclosure:
The second key component of the new rules requires employers to provide detailed disclosure of all plan-level, investment and administrative expenses.  Most employers are unable to communicate to plan-eligible employees, participating former employees and beneficiaries exactly what their share of the plan costs are.  Service providers have until July 1, 2012 to become compliant.  Plan administrators have until August 30, 2012 to provide the initial annual disclosure of both “plan level” and “investment level” information including complete disclosure of fees and expenses.  Employers must be able to provide this information for all administrative and investment costs associated with their plans.  Investment information must include performance results as compared to relevant benchmarks, and generally should be provided in an easy-to-compare format and include a chart.  Disclosure should also reference a website providing additional information on investment choices.  IRA’s, SEP’s and SIMPLE plans are not affected by the new regulations.  Third Party Administrators and Investment Managers will be key partners to employers in helping them adhere to ERISA guidelines while providing support to employees in planning for retirement.

The new 404a-5 regulations will provide additional transparency and, more importantly, will open the channels of communication between service providers and employers, and employers and participants, respectively.  Preparing for retirement is a daunting task, and with the shift toward defined contribution plans comes the added responsibility of individuals to do their homework and be prepared, so that they can enjoy life after their working days are over!  invest right, live right!TM

Pawleys Investment Advisors is a Registered Investment Advisory company offering fiduciary investment management.  We do not provide tax, actuarial or legal advice.

Source: Council of Economic Advisors, February 2, 2012.

© 2012 Pawleys Investment Advisors, LLC.  All rights reserved.

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