Advancements in 401(k) Plan Will Improve Clarity
Column by Jack Goldberg
401(k) plans have been a staple of our retirement planning since 1978 when they were first created. There are over 72 million Americans who have self-directed 401(k) plans, over 3 trillion dollars!
For the most part, people seem to understand the basic idea – money is taken out of their paycheck (pre-tax) and invested. The investment returns are tax free until withdrawn at retirement.
What is not so clear is what does all of this cost? Or, how much of my money actually gets invested versus being paid out in fees, commissions and expenses? Good question. In fact, when surveyed many people think that their plans are “free” or that the employer pays all the expenses. In good economic times people seem to ignore fees. In poor economic times fees can be a big deal and wipe out a significant amount of the return.
Well, of course, we all know nothing comes free, and as an employer you have a fiduciary responsibility to make sure that the 401(k) services provided are appropriate, and the cost of the services are reasonable. If participants are allowed to direct their investments, then the employer is obligated to make sure the participants have all the information in regard to the plan so they can make informed decisions. Compliance is critical. As a Plan Sponsor, you have fiduciary responsibilities under ERISA. Non-compliance exposes you to fines, excise taxes and even civil or criminal penalties.
This is serious business! The idea of informing participants about expenses sounds easy, but expenses can be hard to uncover, much less who is actually paying them. Plus, up until now, the industry has frankly been reluctant (or perhaps fearful) of making it easy for us to understand what the plans really cost. The good news for employers and participants is this is about to change.
Starting this month, say hello to ERISA Section 404(a)(5) and 408(b)(2). This is the Department of Labor’s (DOL) three pronged strategy (the third is a new Form 5500) to improve the disclosure of fees, making it easier for individuals and companies to truly understand what their plans are costing. This is good news for companies and individuals. We should all be able to make better, more informed decisions, and over time plans should become less expensive.
Here is how this will work:
Starting July 1, 2012, Plan Service Providers must disclose fees and services to employers (Plan Sponsors). This means the “vendors” that are making money off the plan need to disclose what they are doing and what they are charging. This includes the Investment Advisor(s), Record Keeper(s), Third Party Administrators (TPAs), and any others who may receive indirect compensation from the plan, such as accountants, attorneys, actuaries, and auditors.
By August 31, 2012, Plan Sponsors (employers) must disclose a whole bunch of information to employees. This information must include plan-related investment and administrative fees that may be charged to an employee’s account. And the services provided must be described. This includes the infamous “hidden” fees such as 12b-1 fees and sub-agency fees. This alone could be an “eye-opening” experience for employers and employees!
- Get help. Contact your investment advisor and ask for assistance. Much of this is new so even the experts are trying to figure it out. Don’t try and do this on your own.
- Do some of your own research. Check out the DOL sites at www.dol.gov/ebsa/publications/undrstndgrtrmnt.html
- Watch the mail. Service providers are sending information that you will need.
This is, of course, just a summary of the fee disclosure requirements. There are complexities in the law that easily exceed most HR professionals’ expertise. Our suggestion is to bring in your own investment advisors or ask for an “independent” review of your existing plan. Benchmarking your plan against industry standards can be quite enlightening.
If you need further assistance on this or any other human resource issue, call Forté Human Resources.