Employer-sponsored 401(k) plan fees can cut retirement savings by 30 percent over a lifetime, according to Demos, a public policy research group. However, recently enacted disclosure requirements will shine a light on the hidden fees for plan sponsors and participants.

For employers that sponsor retirement plans, there is a fiduciary responsibility.

“You, as a plan sponsor, might be overwhelmed due to lack of expertise and wish to avoid extra time spent thinking about and understanding retirement plan fees,” says Kimberly Flett, CPA, QKA, QPA, director of retirement plan design and administration for SS&G. “However, you are ultimately responsible for adequate disclosures if you are the owner of a company that maintains a qualified plan.”

Smart Business spoke with Flett about how employers can take responsibility as retirement plan sponsors beyond passing along a stack of papers or website addresses to participants.

What are the new fee disclosure requirements for plans?

The Department of Labor was concerned that 401(k) plans with underlying investments of different types and the related providers — investment managers, brokerage houses — that maintain the investment accounts take out revenue from the various funds to pay fees without sharing or disclosing the information to plan participants. The disclosure requirements hold the investment managers accountable and educate participants about the costs in the underlying investments within the retirement plans.

The new fee disclosure requirements have been established for a while, with additional retirement expenses being reported on many retirement plans’ Schedule C as part of Form 5500 reporting to the DOL. They were brought to the forefront more expeditiously because of how the economy plummeted a few years ago. Several interim regulations were passed, with final regulations taking place in 2012.

What does disclosing these fees entail?

There are two parts to the disclosure. Under the first part, the covered service provider that manages your retirement funds was required to begin disclosing to you, as plan sponsor, all the plan costs as of July 1, 2012. These included items such as name and type of investment, performance data, benchmarks, ratios used in calculating expenses and the allocation of all fees — to a third-party administrator, the adviser or licensed dealer, or the company that maintains the fund. The formulas used with those amounts also had to be disclosed.

As of Aug. 30, 2012, the plan sponsors of qualified plans had to start disclosing this information to participants in the plan, explaining what the fees are and how they work. The plan’s statements had to be updated to comply with the regulation.

How much do plan sponsors and their accountants need to understand about the disclosures?

Ultimately, as the plan sponsor, you bear what is called fiduciary responsibility. Therefore, you need to work closely with professionals, advisers and vendors who know how to interpret these disclosures. Take time to read the disclosures and understand how the investment provider is complying. Then make sure your participants are truly being informed and will continue to be so on an ongoing basis.

It’s a good idea, for example, to appoint your HR manager, internal accountant and CFO to an internal 401(k) committee with the responsibility of reviewing the data, educating themselves and then sharing their knowledge with participants. Does this committee have to be experts? No, but they have to make a reasonable effort and know where to go if they don’t have the answers, such as to an attorney familiar with the Employee Retirement Income Security Act of 1974 or a third-party administrator.

Your employees, once they get their third quarter statements, will be coming to you with questions. You need to be able to connect them with the right experts so employees can receive the necessary answers.

If a company’s provider fails to properly disclose its costs, will the company be held accountable?

Failure to comply with the regulation is considered a prohibitive transaction that can be subject to fees and penalty impositions from the DOL. But there are further ramifications beyond the DOL coming after the plan sponsor for improper disclosures.

A participant might leave your company and be unhappy with the funds or platform that you, as the plan sponsor, chose, because he or she lost money. That former employee could seek out the DOL and get an attorney. Then you could have to prove that you took every precaution to ensure the plan ran smoothly and made smart investments. If the plan did not, you might be held accountable.

It’s too soon to say what the short- or long-term ramifications will be, but as a plan sponsor the first thing you need to do is arm yourself with the right expert advisers. Then make inquires to be forearmed; the preparation phase will help curtail a lot of negative fallout that could potentially happen.

How do you think this will affect the retirement planning industry?

Third-party administrators will be needed more than ever for their expert advice. This disclosure law also brings visibility to the industry, which opens doors for discussion that sets up additional chances for education and awareness about retirement plans.

Despite more costs being in the open, employers should still take a comprehensive approach to retirement planning. Looking at service, benchmarking and longevity, as cheap is not always better. A company might have the highest number of new plans each year because of the low costs, but it also could have low retention rates because of service

issues.

 

Kimberly Flett, CPA, QKA, QPA, is the director of retirement plan design and administration for SS&G. Reach her at (330) 668-9696 or KFlett@SSandG.com.

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Published in Akron/Canton

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.

Published in Cincinnati

Beginning in May, approximately 60 million people will discover some new information in their 401(k) statements. Not only will they find out whether they made or lost money, for the first time, many will see how much they paid in plan fees and expenses.

Of course, plan sponsors not only have to comply with the new regulations and meet their fiduciary responsibilities, but they also have to justify the plan’s administrative costs to participants, who have been resorting to class action lawsuits after enduring more than a decade of lackluster returns.

“Plan sponsors may face a tsunami of anger and questions from participants unless they get out in front of this change,” says Kyle Pifher, principal, retirement plan services for Findley Davies. “Otherwise, some participants may be shocked to discover how much they’re paying in plan fees.”

Smart Business spoke with Pifher about the impact of the new disclosure regulations and why plan sponsors need to take proactive steps to address employee concerns.

What are the new mandates?

There are two critical components in the new regulations. First, beginning in April 2012, third party providers and recordkeepers must disclose a detailed summary of all fees and charges that exceed $1,000 to plan sponsors as mandated by 408(b)(2). Then starting May 31, individual participants will see their portion of those fees on their plan statements as mandated by ERISA Section 404(a)(5).

Why did the DOL propose new regulations?

The need for greater transparency became apparent following the market correction in 2008, when participants openly questioned fees as their account balances plummeted. Essentially, there was no consistency in the way fees were assessed or disclosed, making it difficult for plan sponsors to uphold their fiduciary responsibilities, which include prudent selection of service providers, monitoring fees and ensuring that reasonable compensation is paid for services to maintain the plan. In other words, the DOL is simply responding to the long-standing need to disclose a detailed break-out of fees and expenses that were often consolidated into a single charge or hidden in the fine print.

How do the changes shift or alter the duties and responsibilities of plan sponsors?

The fiduciary responsibilities of plan sponsors are essentially the same, but the new laws and detailed fee disclosures will certainly illuminate their rigor and performance. For example, participants may wonder whether the fees are reasonable given the plan’s risk and returns, since fiduciaries have an obligation to act prudently and solely in the interest of participants by monitoring plan fees and ensuring that the charges aren’t excessive. So, sponsors will need to show how they benchmark third party fees and be prepared to explain their selection and oversight methodology. Participants may also question their investment choices.

What are the benefits for plan sponsors and the possible drawbacks or unintended consequences?

Certainly the increased transparency will help sponsors benchmark and compare fees across companies and industries and negotiate every charge, which could ultimately lower the total cost of the plan. The good news is that the fee disclosures may encourage participants to read their statements and manage their investments, because optimizing retirement plan returns benefits everyone in the organization. On the negative side, this could create animosity toward the employer if fees have not been disclosed and employees feel as if they have been left in the dark. And we’re seeing more class action lawsuits from disenchanted participants, who are protected by the prudent man rule, which states that trustees must manage another’s money using skill and care.

How are companies using this new information to assess service provider fees?

We’re seeing more companies engage an outside consultant to conduct plan reviews and side-by-side fee comparisons along with a greater desire to benchmark current fees against industry standards. As a result, more companies are soliciting bids and changing providers, especially if they feel that plan providers aren’t charging reasonable fees or delivering value.

How can plan sponsors head off problems before they occur?

Follow these steps to head off problems before they occur.

  • Review third party fees and expenses: Know where you stand before participants receive their May or June statements, so you can anticipate their concerns and negotiate fee reductions or even change providers. It’s also prudent to review your plan’s investment choices to see if they are aligned with your employees’ risk tolerance and desired rate of return based upon the current needs and demographics of your employee population.
  • Communicate transparently and proactively: Fully disclose all service fees using language and terms that resonate with your employee base. Describe the services they provide and how your current fees compare to those charged by other providers.
  • Provide education: Offer educational meetings, brochures and call center support, so employees understand the role of plan providers and how they develop their fees. In fact, this is the perfect time to review retirement plan fundamentals and the current investment options; because your 401(k) isn’t a benefit unless it actually helps your employees meet their retirement goals.

Kyle Pifher is principal, retirement plan services at Findley Davies. Reach him at KPifher@findleydavies.com or (614) 458-4651.

Published in Akron/Canton

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