Mandated transparency to retirement account fees

Greg McDermott, Executive Vice President, FirstMerit Retirement Plan Services

Retirement plan participants and sponsors will gain more information about their plans’ fees and expenses when changes from the U.S. Department of Labor require comprehensive disclosure from service providers.

“The outcome of this change is going to be a much more level playing field of service providers and investment companies in terms of how and what they charge,” says Greg McDermott, Executive Vice President, FirstMerit Retirement Plan Services.

About 72 million workers participate in 401(k)-type plans, representing about $3 trillion in investments, according to the U.S. Department of Labor. All will be affected by these disclosure changes.

Currently, neither the plan participants nor the company providing the retirement plan are required by law to be informed of what fees the third-party plan administrator and investment manager charge and what that money covers. In fact, last year’s AARP survey revealed that 71 percent of 401(k) participants said they didn’t think they paid any fees.

McDermott explains that the disclosure mandate was supposed to take effect last summer but the deadline was extended twice to give providers more time to prepare by implementing new software, creating new reporting plans or adjusting their administrative processes. The mandate now takes effect July 1, 2012.

“For many other providers, it will be a dramatic change,” McDermott says. “But for FirstMerit, it’s not a significant change in terms of the way we currently charge for services and our level of disclosure. According to McDermott, FirstMerit already discloses the fees it charges for both its administrative and investment services and will now simply formalize the process to comply with specific aspects of the regulations. “We’re moving forward to meet the deadlines,” McDermott said. “In fact, our relationship managers are getting prepared to communicate the new regulations and what they mean to our clients and prospects.”

What does the change mean to service providers, sponsors and participants?

 

Service providers of retirement plans need to make sure their fees are reasonable, McDermott says. The Department of Labor has reported that the fees will need to meet industry benchmarks but has yet to define those benchmarks. FirstMerit, however, has already proactively compared its fees to available industry data that list average fees for different size retirement plans and found them to be both reasonable and competitive.

McDermott anticipates that review of provider fee information by plan sponsors will become a critical part of their compliance protocol. Although service providers are tasked with developing the required disclosures, plan sponsors face fiduciary liability for ensuring the disclosures are received, reviewing them and making certain their arrangements with providers are reasonable. McDermott recommends that plan sponsors begin a dialogue now with service providers to understand what assistance they will receive from their providers.

With the change, plan sponsors are responsible for seeing that plan participants will receive two categories of information—general information on plan restrictions and an explanation of any fees and expenses for plan administration such as investment advisory, legal, accounting or recordkeeping services. Additionally, the new regulation requires that participants receive information about each designated investment option in a comparative chart. According to McDermott, this may include items such as performance information over one-, five- and 10-year periods, a description of any shareholder-type fees, and the total annual operating expenses of the investment options.

“This will outline for participants the investment fees they pay in both percentages and dollars,” McDermott explains. “It will give them a picture of their retirement plan in hard dollars.”

Service providers, sponsors and participants also should be aware of the timing and impact of the impending regulation. Once the regulation takes effect July 1, 2012, expect changes in the marketplace because, as McDermott explains, more plan sponsors will be inclined to compare their fees to benchmarks, which will make the marketplace more competitive. As a result, some providers may need to align their fees more closely with benchmark levels.

“In the end,” says McDermott, “I think this trend toward transparency will benefit plan sponsors and certainly the participants in the long run because fees and fund expenses will be more competitive across the marketplace.”

What service providers must disclose

While the retirement plan fee disclosure mandate has many nuances, FirstMerit’s Greg McDermott offers
highlights of the information providers are required to share with plan sponsors:

  • Description of the services provided (e.g. record keeper or securities broker).
  • Description of designated investment alternatives available to participants.
  • Consulting fees, actuarial fees, custodial fees and third-party administrative fees.
  • All direct compensation earned by the provider as well as any indirect compensation that may be received. For example, a mutual fund company may pay the provider a small fee to provide its mutual funds.
  • Description of any compensation that will be paid to the service provider, whether it is charged against the plan’s assets or paid directly.
  • Any fees that will be paid upon the termination of the arrangement.
  • Information necessary for the plan to comply with ERISA reporting and disclosure requirements.

Want to learn more about the changes or investment accounts in general? Contact Greg McDermott, Executive Vice President, FirstMerit Retirement Plan Services, at [email protected]

The opinions and information contained in this message have been derived from sources believed to be accurate and reliable, but FirstMerit Bank, N.A. makes no representation as to their timeliness or completeness. This message does not constitute individual investment, legal or tax advice. All opinions are reflective of judgments made on the original date of publication and do not constitute a guarantee of present or future financial market conditions.

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