Anthony Kippins

Many companies sponsoring 401(k) plans may not be aware that they’re facing a critical regulatory deadline on August 30.

That’s the federal deadline for disclosing to employees the amounts of fees that they’re paying for their plans. The overwhelming majority of these investors don’t have the vaguest idea how much they’re paying in fees.  If you’re an employer at a small or mid-sized company, there’s a good chance that you don’t either.

That’s right. Fees, one of the biggest determinants of whether 401(k) plans make or lose money for investors, are a big question mark. For decades, this has been neglected by employers, employees and federal regulators. This state of affairs has been fine for service providers, including the large insurance companies that package up these plans and supply them to employers. After all, less disclosure means less attention paid by investors, and higher fees for lack of comparison shopping.

Because of new federal rules that expand and reinforce existing regulations and reverse years of lax regulatory enforcement, all of this is changing. Employees will soon be informed exactly how much money is being deducted from their 401(k) accounts to pay fees. They’ll learn of these fees this fall in their account statements, as required by the new federal rules.

Previously, these statements merely showed investment account totals after fees were taken out, so employees likely attributed low returns to poor investment performance rather than damage done by fees.

The amounts of these fees shown in the statements will doubtless come as a rude surprise to many employees, sending them streaming into your company’s HR department. They won’t be smiling.

If you’re following federal rules, however, your employees will already know about these fees when they receive their accounts statements. The new rules require employers to send employees a simple document showing fees in an easy-to-understand format by August 30. This way, the fall account statements won’t come as a shock to employees. Employers are also required to determine whether these fees are reasonable relative to the broad market.

By adopting and enforcing the new rules, the U.S. Department of Labor (DOL) is shedding light on not only the fees service providers are charging, but also the quality of these plans.

For example, if plans are paying a service provider substantial fees but employees receive little, if any, education on how to construct and maintain their portfolios within their plans, this makes for the worst of all possible scenarios: high fees and poor service, resulting in low potential for good investment returns.

Without reasonable fees and knowledge of how to use their plans, employees can’t be effective in serving as their own financial planners, which is essentially their role as 401(k) investors.

Employers are required to prepare the disclosures due this month from information that they should have received by now from service providers.

But many employers, doubtless, will be between a rock and a hard place. While employers are on the hook for clear disclosure this month according to a set format, the new rules don’t require service providers to provide this kind of clarity when they supply the fee information to employers.

Regardless of their size, companies that fail to comply with the new rules may be hit with severe fines and other sanctions. This prospect is intimidating, but the sweeping new regulations should be viewed as an opportunity to make your plan work better for workers and management alike, possibly while lowering fees.

After determining what your plan’s fees are and what you’re getting in return, you’re required to determine whether they’re reasonable by benchmarking them against the current national market.

You may well find that you can get better service with lower fees – improving employees’ understanding of plans and increasing net returns after fees are taken out of their accounts.

But first, employers face rigors surrounding the disclosures of the coming weeks.

To deal with these challenges:

1. If you haven’t done so already, get to work pronto on the fee disclosures due August 30. The first step is to determine whether your service providers have fulfilled their regulatory obligations by supplying the fee information – including the specific services being provided for each amount – to your company.

2. If you’ve received this information, set to work interpreting these documents. This can be a lot tougher than it sounds, as some plan providers are burying pertinent information in lengthy documents. If, at the outset, this task seems too difficult or time-consuming, consider hiring an independent fiduciary advisor to assist you with this, as well as with benchmarking your fees against the market. Using a fiduciary can significantly reduce your company’s liability.

3. If service providers have failed to supply the required fee information, document this by writing to them and requesting speedy submission. This can insulate you from liability for not disclosing the information to employees on time. If these providers don’t respond immediately (after all, the deadline is fast approaching), protect your company by blowing the whistle on them with the DOL.

4. Prior to making the fee disclosures this month to employees, notify them in meetings and/or in emails of what is coming their way. Tell them this is the first step in a process to review – and, possibly, to lower – fees and to improve service, including the provision of better plan education. Again, an independent advisor can help with this.

5. Throughout this notification/disclosure process, document all questions that employees ask and the answers they receive. This helps manage your legal and regulatory liability, and it helps you develop the best answers to give when the same questions come up again.

If you haven’t started this process or are behind schedule, don’t think about water that’s passed under the bridge. Instead, look upstream. Even the sternest of regulators will acknowledge that well-meaning efforts to comply, however belated, are far better than inaction or ignorance of the new rules.

Anthony Kippins is president of Retirement Plan Advisors, Ltd., a Registered Investment Advisory firm that addresses the needs of retirement plans and the employees who invest in them.

An Accredited Investment Fiduciary Analyst (AIFA®) with more than 30 years of experience domestically and abroad, Kippins specializes in providing fiduciary advice to retirement plans on governance, investments and educational services. He also advises individual clients on retirement planning and investment management after retirement.

Kippins also serves as managing director of Institutional Fiduciary Assurance LLC, an organization that provides fiduciary advice to trustees of endowments, foundations, non-profit organizations and charitable trusts. He can be reached at rpa@retirementplanadvisorsltd.com.

If you’re the HR director of a small or mid-size company, you’re probably familiar with the list of investments available to employees under your 401(k) plan.

Yet, chances are that no one at your company knows how your plan ended up with its particular selection of investments. That’s because these plans typically aren’t bought, but aggressively sold – by large insurance companies acting as plan providers.

Often, the fees these they charge are far too high, relative to the market, for the services being provided – a widespread reality that the federal government is trying to change by requiring employers to take steps to assure that these fees are reasonable.

This requirement is part of a larger regulatory effort to prompt companies sponsoring 401(k) plans to take a hard look at them. When scrutinizing their plans, many companies will find shortcomings including too few investments and lack of care in their selection. Answering the question of how investments got into their plans opens up a Pandora’s box of issues.

Many companies will realize that they’ve failed to adequately monitor the performance of investments in their plans or to assure that the risk/reward characteristics are fully explained to employees who depend on these plans to provide income during retirement.

When companies sign up for pre-packaged plans that may be deficient, they sincerely believed they were getting a good product. After all, large insurance companies have to be accountable for the integrity of their products because they have substantial legal liability for their suitability, right? Wrong. As plan sponsors, employers – not plan providers -- carry substantial civil and regulatory liability for their 401(k) plans.

Amid the examination of the plans that new federal rules will spur in the coming months, many employers will come to grasp the full extent of their legal responsibility – their fiduciary liability – for the first time.

These employers – as well as those who already have an inkling or even a full awareness of their fiduciary role – will be seeking tools to guide them through the process of evaluating and revamping their plans.

The most critical tool available for this purpose is an investment policy statement (IPS). This document includes a detailed list of a plan’s investments, the selection criteria used for their inclusion, how these criteria pertain to the company’s particular worker population, the monitoring processes used to continuously evaluate investment performance, the performance benchmarks these investments’ must meet to qualify for and remain in the plan, the governance processes the company uses to make substantive changes, provisions for disclosure of information on investments to employees, descriptions of programs for educating employees on investing concepts so they can understand these disclosures, and on and on.

Thus, an IPS is a soup-to-nuts blueprint for the plan, its administration and its ongoing maintenance. But a good IPS doesn’t stop there. It is a living, breathing document that shifts with long-term investment market trends and changes in employee demographics. It should be constantly re-evaluated and slavishly adhered to. If you’re changing any aspect of the plan, do these changes comport with the governance principles and guidelines set down in the IPS? They’d better – or else the company could lose sight of the plan’s goals, jeopardizing its capacity to influence positive retirement outcomes.

Investment policy statements aren’t just used by 401(k) plans. They are widely used by investment advisors, trust administrators and other financial fiduciaries to establish mutually agreed-upon principles and criteria for managing assets according to clients’ goals and risk tolerances.

In a sense, 401(k) plans themselves are financial planners insofar as they include investment options – though ultimately, investment choices are up to employees. An IPS for a 401(k) plan should bridge the gap between the plan and each employee to guide investment choices. And, just as financial advisors with integrity serve their clients in their best interests, communicating clearly about such issues as risk versus reward and allocating assets to achieve sufficient portfolio diversification, an IPS should assure that plans give employees a sufficient variety of choices to meet their goals and empower them to make the best choices.

Drafting an IPS should be the first thing a company does when establishing a 401(k) plan. And in a perfect world, this is what all companies would do. Many large-company 401(k) plans have investment policy statements – or something akin to them. But to HR managers and owners of many smaller companies, “IPS” understandably might sound more like an overnight parcel delivery service than a critical financial document that can determine whether employees have to keep working into their 70s and 80s.

Because of the new rules, many HR people at smaller companies will have to considerably increase their knowledge of how 401(k) plans are supposed to work – or their companies may risk severe regulatory sanctions from the U.S. Department of Labor.

Companies can start by obtaining a clear view of their plans to determine their deficiencies and decide what to change. Those changes should be reflected in an IPS which, if constructed correctly and followed carefully, can help companies exercise a high level of due diligence that can keep regulators and lawsuits away.

If you don’t know what an IPS is, it may be next to impossible to construct one yourself. In this case, it’s probably best to engage the services of an independent advisor who can also X-ray your plan and suggest changes.

If you or anyone at your company can remember the meetings with the broker who sold your company your 401(k) plan, you’ll recall that these sales people didn’t offer to construct an IPS. That’s because this is a service provided by fiduciaries. Plan providers and brokers avoid this status – and its attendant liability – like a bad rash.

To stay ahead of regulators, there’s much work to be done. The benefits of doing this hard work go far beyond staying out of trouble. Assuring that your company provides competitive benefits that help employees retire with dignity isn’t just the right thing to do; it can also aid recruiting and increase employee retention.

And when an employee asks how your plan’s investment selection came to be, you can pull out the IPS and read them the reasons.

Anthony Kippins is president of Retirement Plan Advisors, Ltd., a Registered Investment Advisory firm that addresses the needs of retirement plans and the employees who invest in them.

An Accredited Investment Fiduciary Analyst (AIFA®) with more than 30 years of experience domestically and abroad, Kippins specializes in providing fiduciary advice to retirement plans on governance, investments and educational services. He also advises individual clients on retirement planning and investment management after retirement.

Kippins also serves as managing director of Institutional Fiduciary Assurance LLC, an organization that provides fiduciary advice to trustees of endowments, foundations, non-profit organizations and charitable trusts. He can be reached at rpa@retirementplanadvisorsltd.com.

New federal rules regulating 401(k) plans will ultimately have the effect of driving down fees — but, in many cases, at a cost.  One result of an increased emphasis on price will be a lack of attention to value. The result of this could be a commoditization of plans that makes them less expensive but not necessarily any better for participants, and in some cases worse.

The new rules from the federal Department of Labor (DOL) require employers to determine, and all service providers to disclose, all fees and the services they cover by July 1. Though the DOL has sent plan sponsors reams of documents outlining its requirements under the new rules — and listing fines that could befall them for not complying — many of these employers remain unaware of this deadline.

Those who are dutifully on schedule for this compliance are also probably aware that they must then determine whether these fees are reasonable — that is, where these charges fall in the national market. If employers find that these fees are relatively high, they must make arrangements to assure that they’re reasonable, perhaps by changing service providers.

Previously, federal rules didn’t require these service providers, including the large financial institutions that package 401(k) plans and sell them to companies, to disclose all fees. Though service providers have long been required to disclose fees when asked, mandatory disclosure rules stemming from the Employee Retirement Income Security Act (ERISA) of 1974 haven’t come close to covering the plethora of fees charged by plan providers, investment companies supplying investments for plans and the advisors engaged by sponsors.

Thus ensued decades of murkiness about fees, further beclouded by the benign neglect of overworked HR people at small and midsize companies. Aware that this state of affairs has led to excessive fees in many cases, the DOL is trying to do something about it to stanch the unnecessary hemorrhaging from employees’ retirement accounts. By requiring employers to know these fees and seek out lower ones when appropriate, goes the federal logic, excessive fees will inevitably shrink under the sunlight of disclosure.

There’s little doubt that the new rules will have this effect — accelerated by the entrée of low-cost providers in what will be an increasingly low-cost arena — but they will also have an unintended consequence: commoditizing 401(k) plans, often to the detriment of participants. Like most quantitative analyses, benchmarking fees will inevitably result in apples-to-oranges comparisons. How else can one say, without reams of nettlesome footnotes, precisely where one service provider’s fees land relative to those of its competitors?

The DOL is seeking to retain a focus not just on price, but on value, as the new rules require employers to determine and benchmark fees “for services provided.” Yet in plan sponsors’ rush to benchmark fees — and, in many cases, after getting eye-opening results, to seek lower ones — this stipulation doubtless will receive short shrift unless sponsors steadfastly maintain a quality orientation.

The rationale for preventing excessive fees is to enable employees to accumulate more wealth to get them through retirement. Yet if employers fail to also focus on services, plans won’t be able to serve participants by delivering the best returns for their particular situations: their age (time horizon for retirement), retirement goals, risk tolerance, retirement goals and existing wealth.

It’s entirely possible that after plans’ fees are benchmarked, some sponsors will find service providers who will do the same work as their current providers but at a far lower cost. Or these sponsors might hit the jackpot by finding lower fees accompanied by much better service. Yet the powerful tide of commoditization will surge against the likelihood of these outcomes unless sponsors view the new rules as a wake-up call for positive action; they should view them as an opportunity to lower fees and improve service.

This conscientious mentality compels consideration of what the components of good service might be. These include governance to maintain a steadfast dedication to employees’ interests, investment evaluation to examine the worthwhileness of specific items such as mutual funds, and education to empower employees to make intelligent, unbiased choices for their 401(k) portfolios.

Without sufficient plan education, a 60-year-old employee might end up with the same portfolio risk levels as 25-year-old, exposing him to potential losses from which he will never have time to recover and thus jeopardizing his retirement.

The new rules also require sponsors to make clear distinctions between fiduciaries, who are legally bound to advise clients in their best interests, and brokers, who are prohibited by ERISA rules from advising participants on the suitability of specific investment products.

So, at a time when the lead service provider in many 401(k) plans is a broker whose services may be fraught with conflicts of interest, it’s more important than ever for plan sponsors who want to enhance plan quality to seek the advice of a wholly independent fiduciary. Moreover, in an era when people change jobs and investment markets put on different faces from year to year, such advisors can play a highly beneficial role in assessing the fees of plan providers on a regular basis, preferably every 90 days.

Discipline is essential not only to get plans in shape, but also to keep them that way. Staying in shape may require a personal trainer working with you in your interest; this doesn’t necessarily come with the lowest-price gym membership.

Aside from doing the right thing for your employees, there’s another reason to assure that the rush to lower fees doesn’t eclipse considerations of quality: It’s smart business.

Remember that one reason your company has a 401(k) plan in the first place is to be competitive in the marketplace for skilled employees. Sponsors whose plans have the best returns and best employee outcomes will have an edge as the economy recovers and the labor market gradually ceases to be a buyer’s market.

This is not a lure that you can fashion in short order. To attract the best employees five years from now, you must begin work on your plans today. The new DOL rules present an unprecedented opportunity to do so.

Anthony Kippins is president of Retirement Plan Advisors, Ltd., a Registered Investment Advisory firm that addresses the needs of retirement plans and the employees who invest in them.

An Accredited Investment Fiduciary Analyst (AIFA®) with more than 30 years of experience domestically and abroad, Kippins specializes in providing fiduciary advice to retirement plans on governance, investments and educational services. He also advises individual clients on retirement planning and investment management after retirement.

Kippins also serves as managing director of Institutional Fiduciary Assurance LLC, an organization that provides fiduciary advice to trustees of endowments, foundations, non-profit organizations and charitable trusts. He can be reached at rpa@retirementplanadvisorsltd.com.

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 rpa@retirementplanadvisorsltd.com.

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 rpa@retirementplanadvisorsltd.com.

Thursday, 01 March 2012 17:49

New rules highlight 401(k) education lapses

Federal rules have long required employers to provide employees participating in 401(k) plans with enough information to manage their investments and make informed investment choices. But many employers ignore the spirit, if not the letter, of these rules — assuming that they’re aware of them in the first place.

Commonly, employers sponsoring plans are unaware of their responsibilities under the Employee Retirement Income Security Act (ERISA) of 1974. This lack of awareness is coming into sharp relief now that the federal Department of Labor (DOL) is instituting new rules regarding 401(k) plans. The new rules require plan sponsors to assure that the fees of service providers are reasonable, as these fees ultimately come out of the pockets of their employees. To the extent that advisors charge plans for educating participants on how to get the most out of their plans, the new regulatory era raises the question: Are these advisors delivering the education services that employees are paying for?

Frequently, they aren’t. This will become increasingly apparent beginning this summer, when service providers will be required to disclose — and plan sponsors, to ascertain — all fees and the specific services being provided for them. Many employers will find that in cases where plans are paying advisors for education services, these advisors aren’t even providing participants with the most superficial information required by ERISA. As the DOL rules shine light on employers’ responsibilities as fiduciaries (a legal/regulatory status that carries substantial liability), this lapse could expose employers to potential penalties from regulators and lawsuits from employees.

Plan sponsors are accountable for assuring at least minimal compliance in this regard. They aren’t required to have plan advisors. But if they do, they are responsible for holding these advisors’ feet to the fire to deliver contracted services, including the disclosure of basic plan information required by ERISA. Otherwise, plans are violating rules of ERISA and potentially new DOL rules, because fees can’t be reasonable if advisors are charging for something they aren’t delivering.

Even when employees receive basic plan information, they typically have no idea what to do with it because they aren’t getting substantive instruction on the investing basics.  The reality is that employees often emerge from plan educational programs ill-equipped to make investment choices most likely to assure optimal retirement planning outcomes.

Maintaining effective plans with a strong education component isn’t just the right thing to do; it’s the foundation of a retirement plan that complies with federal rules. If plans are not delivering participant-driven education programs, they’re not equipping their participants to make informed decisions about their investments. Therefore, these plans are not compliant with federal rules and thus, they set up sponsors for potential lawsuits.

This summer, when service providers supply plan sponsors with the required list of services they’re providing for their current compensation, companies should take note of whether education programs are included in their services. In many cases, they won’t be.

This shortcoming, along with various others showing how little many plans are receiving for the fees they’re paying, will prompt many sponsors to seek more reasonable fees. The best way to do this is to:

  • Issue a request for proposal (RFP).

  • Compare the scope of services to those offered by other providers for the fees being charged, with emphasis on individual employee assessment and education.

If effective, deeper financial education can empower employees to assess the required basic disclosures through the lens of fundamental financial knowledge. Only then can 401(k) plans ultimately achieve their true purpose: to assure retirement security.

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 rpa@retirementplanadvisorsltd.com.

If you’re an employer who sponsors a 401(k) plan, April 1 is a date that you should circle on your 2012 calendar. This is the deadline for plan sponsors to obtain from plan advisors newly required disclosures stating specifically what services they’re providing and the cost of each.

To some sponsoring employers, this may sound like a bureaucratic requirement of little consequence. This is decidedly not the case. Beginning April 2, plan sponsors who can’t show that they met the April 1 deadline for disclosures — and the best way to do so is to get them in writing, with signatures — will be subject to federal fines, disqualification of their plans and employee lawsuits aimed at their personal assets. 

This requirement is among many stemming from new rules from the Department of Labor (DOL) that go into effect in 2012. The intent of the rules is to protect participating employees from unreasonable service provider fees that shrink their 401(k) accounts. Unbeknownst to employees and many plan sponsors, many plans have long been charged excessive fees. Until now, disclosure of all fees has not been expressly required by federal rules. 

In addition to obtaining the fee and service disclosures, the new rules also require sponsors to determine whether plan advisors are fiduciaries — a legal/regulatory status meaning that these advisors always put clients’ interests ahead of their own. (See “The 401(k) regulatory tsunami.”)

The combined content of the new advisor disclosures will have profound implications for sponsors’ compliance burdens stemming from new DOL rules, which expand or amplify longstanding requirements of the Employee Retirement Income Security Act (ERISA) of 1974. 

Under ERISA, plan sponsors are themselves fiduciaries, with all of the attendant responsibility, accountability and liability. Many plan sponsors have always believed that their long-time advisors are fiduciaries, but this simply isn’t true. Typically, the dominant advisory role in a 401(k) plan is played by a broker, yet precious few brokers are fiduciaries. 

Though ERISA rules prohibit non-fiduciaries from advising on the suitability of specific investments in these plans, enforcement over the years has been lax, allowing many brokers to cross the line between providing employee education and actually advising on the suitability of specific investment options.

Thus, they’ve engaged in the quintessential advisory role — one reserved by law for conflict-free fiduciaries who can share legal responsibilities with sponsors. By contrast, brokers may have conflicts of interest, such as business relationships with financial institutions that provide investments for the plan.  

It is critical for plan sponsors to understand how the dynamics of these disclosures will put an increased regulatory and legal burden on them as fiduciaries: By making it a matter of record whether an advisor is or isn’t a fiduciary, the new DOL rules mean that sponsors will have no credibility in telling regulators that they believed they were outsourcing their own fiduciary responsibilities.

In many cases, details of the new advisor disclosures will trigger epiphanies for sponsors concerning fundamental inadequacies of their plans, bringing a growing awareness of some of the rigors that they must undergo to assure that these plans comply with the new DOL rules.

From the point of view of plan sponsors using a broker to service their plans, this epiphanic moment will often go something like this:

– The sponsor, aware of the importance of these disclosures, does some research and learns what services non-fiduciary advisors can and cannot legally provide.

– In disclosures from the broker, the advisor lists the fees that his or her company is charging and the services provided for these fees: selecting mutual funds for the plan’s investment options, making educational presentations to employees and enrolling them in the plan.

– The broker states unequivocally that he or she is not a fiduciary.

– The sponsor realizes that because plan-education presentations typically involve answering questions about specific investments, they can easily involve advisors’ rendering advice on investments — an activity prohibited for non-fiduciaries.

– Further, the sponsor realizes that this advisory scenario is even more likely at enrollment meetings.

– It dawns on the sponsor: The plan is getting far less actual service than previously believed. Hence, fees for the actual, legitimate services being provided are far higher than the sponsor thought.   

These disclosures are intended to serve as a wake-up call for companies who may be paying far too much for far too little, so they can take steps to change their plans.

When doing so, sponsors should be careful not to make the same mistakes that got them into trouble in the first place. When non-fiduciary advisors pitched them business, they likely said, “We’ll be standing right behind you.” 

By having fiduciaries as their plan advisors, sponsors can be assured that these advisors will be standing with them shoulder to shoulder, sharing their exposure to any incoming regulatory or legal fire.

Anthony Kippins is president of Retirement Plan Advisors LLC, 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 rpa@rpadvisorsllc.com.

Friday, 03 February 2012 17:16

Are your 401(k) plan fees unreasonable?

All too often, small businesses sponsoring 401(k) plans sign contracts with service providers that call for outrageously high fees that are passed on to participating employees.

Many plan sponsors have no inkling that their fees may be unreasonable for the services they’re receiving because they don’t even know the amounts involved. Under new regulations from the federal Department of Labor (DOL) that go into effect this year (see “The 401(k) Regulatory Tsunami”), plan sponsors are now required to determine these amounts and whether they’re reasonable.

The new regulations present a series of compliance hurdles that employers must clear, beginning with a requirement to demonstrate that they’ve determined their plans’ arrangements for fees and services (see “April 1 deadline for 401(k) plans is no April Fool’s joke”). The original deadline was April 1, but the DOL has extended it until an as-yet-unspecified date in July. This extension merely delays the inevitable, so plan sponsors should begin obtaining fee and service disclosures now rather than waiting until the last minute.

The federal government has mounted a regulatory drive to keep workers’ accounts from being drained by 401(k) plan service providers. There is ample evidence to suggest that many of the large financial institutions in this industry (primarily insurance companies offering plans through investment brokers) have long charged fees that are exorbitant.

Under the new DOL rules, workers’ quarterly account statements will now include a listing of fees, so workers will be able to see this drainage. Previously, they received only investment return figures net of fees.

As fiduciaries — a legal status that carries great potential liability — employers have long failed to comply with federal rules designed to protect employees from high fees. Because of the new regulations and their disclosure provisions, employers who continue in this failure will face not only steep fines from regulators, but also hostility from employees when they see just how much they’re paying in fees.

In fees applied to 401(k) accounts over a lifetime of employment, every fraction of a percentage point is significant. Half a percentage point can make the difference between a comfortable retirement and an uncomfortable one.

One would think that, like many products and services, these fees would become homogenized. This is the case in efficient markets. But the market for 401(k) plan services is by no means efficient because plan sponsors, who are busy running their businesses, don’t pay enough attention. They tend to haplessly enter into arrangements with service providers that persist for decades without scrutiny. As a result, fees in this market are all over the map.

For many plan sponsors, especially small companies that lack in-house benefits expertise, this market is foreign terrain. Now, the DOL is requiring that sponsors explore it. This process is known as benchmarking fees — determining where a given plan’s fees stand relative to what’s available on the open market. The data for this is fairly accessible. Far more difficult than finding the data is interpreting it and applying it to a given company’s situation.

For sponsors seeking to avoid apples-to-oranges fee comparisons, the logical move would be to break down fees for each service. Yet many service providers historically haven’t itemized services. They take a sizeable percentage from accounts according to the terms of a vaguely worded contract that guarantees little — except the fees. The new rules require service providers to specifically disclose fees for each service provided.

With this detailed information in hand, sponsors can go about the time-consuming task of researching the market to make fee comparisons. Yet, there’s a way that sponsors can save the time it takes to scroll through endless screens of fee data. They can use a tool with which they are probably already familiar: a request for proposals (RFP).

Instead of going to the market, sponsors issuing RFPs can bring the market to their doorsteps. If much lower fees come in for the same services, then sponsors can engage new service providers. Then, to monitor an ever-shifting market over time, plan sponsors can periodically run spot checks (preferably, every three years) on where their fees stand, issuing RFPs to take serial snapshots of fees against which to benchmark their current arrangements. Thus, sponsors can convincingly demonstrate to employers and regulators that they are continuously endeavoring to determine where their fees stand in relation to what the market has to offer and, if appropriate, changing providers to contain fees.

Procedurally, using RFPs is fairly simple, but the devil lies in the RFP details. Care must be taken to construct the RFP to elicit fee-itemized proposals from firms that are accustomed to servicing plans of the company’s size and contribution levels. As the RFPs should be constructed with this kind of market knowledge, it’s a good idea for smaller companies to engage the services of a qualified advisor to write their RFPs.

Companies that engage qualified fiduciaries for this function have the advantage of actually outsourcing some of their fiduciary responsibility and attendant liability. But when sponsors use brokers, few of whom are fiduciaries, they retain all liability.

The key to complying with the DOL requirement for reasonable fees is to establish a clear, sensible benchmarking process. Plans sponsors can take comfort in the fact that regulators are more interested in seeing a clear process than in a given set of fees, as there is no right or wrong fee solution in this subjective arena. The point is to make an effort by adopting and steadfastly following a sound process.

Yet, employers whose efforts not only result in a good process but also identify reasonable fees for high-quality services — and take advantage of them — will fulfill not just the letter but the spirit of their fiduciary duties. And, most importantly, they will assure a better retirement for their employees.

Anthony Kippins is president of Retirement Plan Advisors LLC, 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 rpa@rpadvisorsllc.com.

Thursday, 01 December 2011 12:33

The 401(k) regulatory tsunami

A regulatory tsunami is headed toward companies sponsoring 401(k) plans. It will arrive next year when new federal rules take effect, creating an unprecedented burden of accountability for employers.

More than ever, employers will be required to assure that fees associated with these plans are reasonable for the services being provided. To do so, they should move expeditiously to determine and evaluate all plan fees.

Employers are already required to exercise this due diligence by the Employee Retirement Income Security Act of 1974. Yet the fees charged by large financial institutions providing 401(k) plans vary widely and are extremely difficult for employers and employees to ascertain. Many aren’t aware that their fees may be too high because, until now, the government hasn’t required plan providers to voluntarily disclose all fees.

Nevertheless, by entering into arrangements with plan providers that involve unreasonably high fees, many employers have been failing to protect participating employees as required by ERISA. To remedy this lack of compliance and to help employees make more informed investing choices, the U.S. Department of Labor has issued the new rules, which reinforce and expand employers’ existing responsibilities as plan sponsors.

Effective in 2012, these rules will open up new terrain for potential federal fines — as the DOL is substantially increasing its investigative staff — as well as lawsuits from employees. This liability stems from employers’ role as plan fiduciaries, a regulatory/legal status meaning that they must consistently put plans’ and participants’ financial interests ahead of their own.

The new rules require plan providers to disclose fees to employees in chart format in quarterly statements. Currently, these statements show investment returns net of fees, so employees don’t know how much they’re paying plan providers or investment companies that supply products for their plans.

Though the rules require plan providers to disclose fees in an easily understandable format, there are indications that the revised account statements may turn out to be long, confusing documents — something on the order of a prospectus. Confusion will ensue, and employees will queue up at HR to ask what it all means.

After making sure employees understand the newly required disclosures — which is, itself, a fiduciary responsibility — employers will undoubtedly be lambasted with bitter complaints from employees who were unaware of the amounts of fees being deducted from their accounts and others who simply thought their actual investment returns were lower.

Accordingly, it’s imperative that employers act now to “X-ray” their plans or engage a qualified consultant for that purpose, so they understand precisely what fees are being charged for the services being provided. This will involve reviewing reams of plan documents and confronting plan providers to ascertain fee information.

But that’s only the beginning. The tsunami’s force is amplified by the “reasonableness” requirement: How can employers know whether fees are reasonable?

To do so, they must determine where their plans’ fees fall relative to industry norms, so employers must benchmark fees against the full spectrum of the national market for plans of the same size providing the same services. These data-intensive comparisons can be highly complex, especially for small firms that lack the necessary expertise in-house.

The new rules also put increased pressure on sponsoring employers to assure that anyone advising 401(k) plans or participating employees is a fiduciary. ERISA rules have long prohibited non-fiduciaries, including brokers, from advising employees on the suitability of specific investments — a scenario rife with potential conflicts of interest.

Yet, because of lax enforcement that the government is now trying to repair, brokers typically play a dominant role in servicing 401(k) plans. By contrast, fiduciaries — who must avoid even the appearance of conflicts — must comply with stringent regulatory standards that don’t apply to brokers. Moreover, fiduciary advisors are subject to substantially greater legal liability.

Hence, the new DOL rules require employers to determine whether plan consultants are fiduciaries. If they aren’t, fiduciary responsibility — and liability — for the plan resides with the employer.

Companies that proactively get out in front of the tsunami by lining their corporate doorsteps with due diligence sandbags will minimize the damage. They have no time to waste.

Anthony Kippins is president of Retirement Plan Advisors LLC, a Cincinnati-based financial services company that provides retirement plan fiduciary services and employee benefit solutions to small companies. He is an Accredited Investment Fiduciary Analyst.