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New 401(k) disclosure rules bring key changes

Rochester Business Journal
August 3, 2012

Your next 401(k) statements are probably going to look very different from what you are used to. The U.S. Labor Department has issued new regulations requiring disclosure of more detailed information about retirement plan fees. The new disclosure will include information about fees for products and services including mutual funds, recordkeeping and general plan administration. This information will show up for the first time in the next round of statements, and 401(k) statements will now have more important and useful information on them.
 
The Labor Department put these regulations into effect because of a concern that most retirement plan participants do not receive meaningful information about the underlying fees charged against their accounts. Mutual fund fees often are buried and hard to understand unless you know to ask the right questions. Plan administration fees are even more difficult to understand. Many participants do not even realize the different types of fees that are charged against their accounts. This lack of information and understanding is significant because of the sheer number of people who participate in a retirement plan through an employer. The importance is magnified because for many of them, this is their only savings.
 
The first phase of implementation of the regulations took place in the spring and early summer. Retirement plan service providers had to deliver information about the cost of their services to plan sponsors (typically employers) by July 1. In the second phase, ending Aug. 30, the plan sponsor aggregates the information and delivers it to plan participants (typically the employees). Some employers will be lucky enough to have this reporting done for them by their providers. Some smaller employers may struggle with gathering the information from different sources before delivering it to employees.
 
Critics are asking whether the department will meet its goal of providing meaningful information. It certainly seems possible that this process will cause employers to look more critically at the fees charged to the plans they sponsor. Some industry watchers believe employees will pressure employers who have failed to look closely at fees to do so in the future. This should hold true especially when employees are unhappy with the service, investment options or the education provided.
 
I believe that the amount of detailed information required will be overwhelming, causing some employers and participants to put it aside and leave the monitoring to someone else. Further, the information will be provided without context. Most employers and participants will not have anything to compare it to. They may find it difficult to judge whether the fees are typical, egregious or even bargain bottom.
 
The new regulations also may lead to a new risk or liability for employers. Now that the regulations are forcing more fee disclosures, it is possible that the Labor Department may begin to hold employers to a higher standard of care with respect to the qualified retirement plans they offer. Employers need to be sure they understand the fee structure, the value and services provided, and how these factors compare to other offerings in the marketplace.
 
There are industry offerings that can help an employer reduce some of this risk. For example, an employer may hire a provider to perform the due diligence on fees, recordkeeping and investments. Providers who have the authority to act as discretionary trustee will take on this role and can assist in reducing both liability and the company resources devoted to retirement plan administration.
 
If you are an employee and a participant in a qualified retirement plan, you should be receiving this information soon or might have already. Ask your employer to confirm that your plan includes reasonably priced as well as well-performing investment options. Note that some well-recognized mutual fund companies have begun to introduce lower-cost mutual fund shares as a result of these regulations.
 
Whether you are the employer, the employee or both, it is reasonable for you to ask how each one of your retirement advisers or providers is compensated. Remember that any saving on costs to your plan may seem minimal today, but a qualified retirement account by its nature involves investing for a longer time horizon. Ten dollars today may be worth significantly more when invested in your account over your working lifetime.

Scott Mahood is retirement services relationship manager with Genesee Valley Trust Co.8/3/12 (c) 2012 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email service@rbj.net.
 


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