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.

Published in Cincinnati

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.

Published in Cincinnati
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.

Published in Cincinnati
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.

Published in Cincinnati

If all your insurance broker has done is market your health care plan to a half-dozen carriers, you may not be getting your money’s worth, says Steve Freeman, president of USI in San Francisco.

“If you have 100 employees and multiply that by $10,000, the average annual premium is $1 million,” says Freeman. “If you are paying a 5 percent commission, your broker is making $50,000 a year on your account just for negotiating premiums. And there’s not a lot of incentive to work for lower premiums, because, as premiums increase, so does his or her commission.”

Smart Business spoke with Freeman about how to create transparency in broker fees and how to get the most for your money.

Why are broker fees becoming more transparent?

The Accountable Care Act requires a minimum loss ratio of 85 percent, so insurance companies have to spend at least 85 percent of premiums on claims for employers with at least 50 employees. And that cannot include broker compensation. As a result, brokers will have to be more transparent with their services and fees.

What questions should business owners ask their broker to make sure they’re getting the best value?

First, ask, ‘How are you impacting the cost of my medical claims, rather than just shopping it to insurance companies?’ Claims costs drive premium. The broker should also be focused on changing employee behavior to make them become better health care consumers. Suggestions should include ideas around aggressive wellness programs, evaluating different funding alternatives and analyzing the overall health status of the group. The broker should un-bundle your claims to help determine what is driving your price, because, if you can lower your claims, you can lower your premiums. Businesses should understand their claims utilization. For example, they could assess whether their emergency room visits are higher than other groups benchmarked in their region or industry. If so, the broker can target employees using the ER and educate them about how using urgent care instead of the emergency room will cost them and the employer much less.

Your broker should also conduct a large claims analysis. If there are very large claims, are employees utilizing the most cost-effective facilities that have better outcomes? You can also design programs to migrate more employees to facilities with better outcomes and lower costs than, for example, a teaching hospital, whose charges may be double but that have the same outcomes.

Can a small brokerage firm meet these needs?

The one-man or 10-man brokerage is dead. If a broker says, ‘call me for everything,’ or ‘I can take care of all your needs,’ that should be a red flag. Those shops can’t survive because they don’t have the intellectual capital for all of the necessary areas of expertise. Nor do they do the volume of business with insurance companies to get the deals that someone with a large volume of premium with these companies can get.

A larger broker will have ERISA attorneys on staff to advise on compliance issues, a medical director to do clinical reviews, teams that conduct analytic and underwriting work, and individuals doing HR and IT work. Brokers should be the quarterback, with a team behind them that understands compliance, legal, clinical, underwriting and communications. The broker’s job is to understand how to orchestrate that team, not to pretend to have all the answers.

What would you say to business owners who are comfortable with their broker simply shopping their plan?

I would ask what that relationship is worth to them. There are businesses that have a few hundred employees with fully insured plans that budget an increase of 12 percent a year.

If that broker is making a 5 percent commission and you are paying him $100,000 a year, what does he bring to you in value? How much business do you have bring in to make $100,000 in profit? Is your broker worth that revenue? What is he doing to bring your costs down?

Employers think they are just paying the insurance premium, and the broker is part of it, and that it is difficult to influence cost. But brokers actually can influence cost. Insurance companies come out with a 12 percent rate increase knowing that they can be negotiated down to 8 percent. The business owner thinks the broker did a good job getting to 8 percent. But a broker with underwriting and claims experience, before you even get the renewal notice, will tell the insurance company that your renewal should be 5 percent based on the underwriting formula of what you’ve done in the past. The broker should say, ‘Our expectation is that you will come back with a 5 percent rate increase, not 8 percent or 12 percent. But based on facts and claims use, it should be 5 percent.’ There is lot of room for negotiation.

How is the commission system changing with more transparency?

Instead of staying with percentage-based commissions, employer groups are paying a flat fee per year, and the broker compensation is based on the level of service he or she is providing. It is not a function of premium, it is a function of the services that broker is delivering to the firm. The employer group negotiates a flat fee per employee per month, or a flat dollar amount per month for the services it is getting, more like fees that are paid to an accountant or attorney.

The value of the insurance benefits should be evaluated based on results and managing total cost. The more transparent compensation becomes, the more aware clients will become of the services that their brokers are providing, or should be providing.

Steve Freeman is president of USI San Francisco. Reach him at (925) 472-6772 or steve.freeman@usi.biz.

Published in Northern California