For employers, it may be a summer of whistle blowing

Anthony Kippins, President, Retirement Plan Advisors LLC

For some companies sponsoring 401(k) plans, the next few months may be a period of whistle blowing – with painful consequences.

If these sponsors fail to comply with new federal regulations, employees may blow the whistle on them with federal regulators, potentially triggering costly fines and other sanctions and paving the way for employee lawsuits; most federal investigations of this type start with employee complaints.

To prevent this unfortunate scenario, some companies may have to blow the whistle on the large financial institutions that provide their plans for failing to provide required information they need to assure their plans comply with the new rules from the U.S. Department of Labor (DOL).

Central to this potential consternation is the reality that many employers — especially small and mid-size companies — aren’t aware of precisely how much their 401(k) plans cost, what their plans and participating employees are receiving in return for these fees and where this value, or lack thereof, lands in the national spectrum of plan pricing for the services provided.

In issuing the new regulations, the DOL is seeking to make employers and employees aware of the value they’re getting for the fees they’re paying as part of a larger effort to enable plan participants to make more informed investment choices. Fees are among the most significant factors affecting total investment returns.

The regulations require employers to know all such fees, and what they’re getting for them, by July 1, and to ascertain whether these fees are reasonable for the services being provided. That means they’ll have to determine where this value stands in the national marketplace by benchmarking fees, which is no simple undertaking.

Also by July 1, the financial services companies, brokerages and insurance companies that provide 401(k) plans are required to have given plan sponsors a rundown on all fees and the services these fees cover. If employers don’t receive this information, they’ll be hamstrung in their efforts to benchmark fees against the market to determine whether they’re reasonable. In such cases, employers will have no choice but to blow the whistle on their plan providers.

However, the companies that provide 401(k) plans tend to be large, highly sophisticated institutions with significant in-house and outsourced legal resources, so they’re amply equipped to protect themselves from liability. Most, if not all, of these companies are expected to deliver the required fee-for-services information to plan sponsors.

But in many cases, this information may be strewn throughout a document the size of a phone book — a document that the human resources people overseeing 401(k) plans at many companies don’t have time to read, much less interpret.

With the July 1 deadline approaching, many employers should have a great sense of urgency. Yet many, unaware of the new rules or their seriousness, do not. In many cases, employers who are aware of the rules aren’t concerned because they’re receiving informal, oral assurances from their plan providers that everything will be all right.

Yet this handholding means nothing because, unlike their sponsor clients, these institutions don’t have fiduciary responsibility, with all the attendant risk and liability. As long as providers meet their disclosure obligations under the new laws, they’ll be fine. Meanwhile, employers who fail to act on this information as required will be left twisting in the wind.

One way that sponsors can reduce their liability is to outsource their regulatory obligations to an independent fiduciary advisor who evaluates plans from the ground up.  This way, sponsors can get an unbiased view of providers’ fee-for-service disclosures and benchmark fees against the national market to determine whether they’re reasonable. If they aren’t, these employers could attempt to negotiate them downward or put their plans out to bid for a new provider. Further, an independent advisor can X-ray plans to see if they’re achieving their various goals and meeting all federal requirements.

This way, they’ll have a better story to tell federal regulators – and employees who may become outraged when they read their statements next fall and learn of the whopping fees being deducted from their accounts. These statements will be the first to show all fees. Currently, statements merely show account totals after these fees have been siphoned off.

Most people outside the 401(k) industry would find it astonishing that 401(k) plan sponsors and participants don’t know the fees involved or specifically what services these fees cover.  Unfortunately, this is a tale of benign neglect for overworked HR departments, especially at small companies that lack in-house expertise in defined contribution plans. There’s always more pressing work to do, and many plan administrators are understandably reluctant to lift the hood on plans that may have longstanding deficiencies. Now, the new DOL rules are changing this state of affairs.

The key language in the new rules is “fees for services provided,” because this focuses on value: Are employees getting services worth the fees being charged? In many cases, they’ll find they aren’t.

Employers who become aware of this sooner than later and act on it in accordance with the new rules will be taking a major step toward protecting their companies and assuring the integrity of their plans and their capacity to help employees build their resources for retirement.

Anthony Kippins is president of Retirement Plan Advisors, Ltd., a Cincinnati-based financial services company that provides retirement-plan fiduciary services and employee-benefit solutions to small companies. Kippins holds the AIFA (Accredited Investment Fiduciary Analyst) designation. He can be reached at [email protected]