The unforgiving compliance clock of new 401(k) rules

Anthony Kippins, President, Retirement Plan Advisors LLC

Across the country, companies that sponsor 401(k) plans have been going about their business every day, unaware of an impending deadline for compliance with sweeping new government regulations.

When the deadlines pass, no alarm will sound. Instead, dire consequences will eventually befall plan sponsors without warning.

The silent alarm goes off July 1, by which time sponsors are required to be aware of all fees charged by their plan service providers and the services they’re receiving for these fees. (The original deadline was April 1.)

Moreover, they must determine whether these fees are reasonable for the services being provided — a complex undertaking that involves benchmarking the fees against comparable plans. Many sponsors will find that their plans are paying far too much for far too little.

Awareness of the new requirements and their comprehensiveness is astonishingly low. Few companies are doing much, if anything, to gear up for the new requirements. By remaining uninvolved, they’re unwittingly bringing on a world of hurt upon themselves.

Until now, sponsoring companies have been able to remain largely ignorant of the full extent of the fees coming out of their employees’ accounts, though federal rules have long required awareness of these matters.

New regulations from the U.S. Department of Labor seek to end this lack of compliance by reinforcing and expanding existing rules.

The quarterly account statements employees now receive from plan providers show returns net of fees. In the fall, these statements will show actual returns and fees in tabular form.  As a result, employees will see for the first time how much their investments have earned and how much plan service providers have taken out of their accounts in fees.

Many employees will see red. They’ll line up outside the doors of HR offices, demanding to know why they’re paying so much.

Companies will get a rude awakening from the clamor of employees reacting to the news that big chunks of their retirement assets are lining the pockets of service providers. They’re going to share this pain with company executives.

The refrain of questions and expressions of outrage will seem never-ending: “How long has this being going on? Why didn’t you tell us? Why haven’t you taken steps to lower fees? Can’t we get lower fees elsewhere?”

This is only part of the pain. The DOL is ramping up staff to monitor — and, potentially, fine — plan sponsors who are tardy meeting these deadlines. It gets worse: Companies that fail to comply with the new regulatory regimen could have their entire plans disqualified, as every transaction conducted on the wrong side of the law could potentially be classified as prohibited.

Since plan sponsors have rigorous fiduciary obligations to their participants, this state of compliance disarray could be a springboard for lawsuits by employees. Indeed, many lawyers who specialize in this kind of action are doubtless licking their chops over the potential for lucrative class-action litigation. Unlike many employers, these attorneys are well aware of the new rules.

No less daunting is the potential for regulatory sanctions stemming from tips from employee whistle-blowers who learn about the new rules from friends at other companies.

If the capital markets act predictably, indications of shakeouts in the 401(k) plan provider marketplace may become readily apparent. Golf and tennis tournament broadcasts this summer may show ads from competitive plan providers seeking to take business away from high-fee providers. HR departments learning about their new burdens this way will be far behind in the extensive preparations required to fully comply with the new rules.

Some plan providers, including large financial services companies, have doubtless given plan sponsors generalized — and, notably, nonbinding — assurances that all will be well. Yet these large companies are committed to nothing because, as non-fiduciaries, they don’t have the same obligations as their sponsor clients, nor do they have any appreciable liability in the matter.

One of the goals of the new rules is to make a clear distinction between advisors and brokers. Although non-fiduciary brokers are prohibited from dispensing actual investment advice, many do. The rules don’t require plans to have an advisor per se, but if they do, this advisor should be a fiduciary. Such arrangements can enable sponsors to effectively outsource some of their fiduciary responsibility.

Moreover, plan sponsors must evaluate newly required compensation disclosures from service providers to determine the motivations involved in determining investment options for the plan. For example, many plan providers charge investment companies for shelf space, which makes such selections biased.

The new rules are designed to support the goal of transparency by helping employees (and company owners, who are in these plans themselves) keep more of their investor returns. Thus, they help everyone in a company achieve the goal of a more dignified retirement. Assuring compliance with these rules advances this mutual goal of labor and management.

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].

Leave a Reply

Your email address will not be published. Required fields are marked *