401(k) Investment Reform

The U.S. Department of Labor is rolling out changes to how retirement plan providers disclose benefits to their employees and experts believe the new clarity will change people’s …

The U.S. Department of Labor is rolling out changes to how retirement plan providers disclose benefits to their employees and experts believe the new clarity will change people’s opinions and understanding of plans like the 401(k). The bulk of the reform involves unmasking the fees involved in investment, and it is likely many small and mid-size companies that offer a plan will switch if their current plans carry unwieldy fees that will soon become apparent to employees. The information being provided is nothing new, but it is being displayed in one document that will make it very clear to employees how much they are paying to invest in their retirement. For more on this continue reading the following article from TheStreet.

New federal guidelines from the U.S. Department of Labor will require 401(k) providers to use an easy-to-understand format when disclosing all fees for plans and underlying investments.

Retirement plan fees have not been easily accessible to employers or employees and the new law is expected to be a game-changer for the 401(k)industry. It’s a fair assumption that small to midsize employers — often given less attractive pricing than large company plans — will be switching plans to more affordable options as the fees are laid bare and their fiduciary duty to employees becomes clearer.

There are close to 500,000 small and mid-size businesses that offer a 401(k) plan. Just over 10% of businesses with fewer than 100 employees have a plan; 67% of those with 100-499 employees have a plan, and about 99% of companies with greater than 500 employees have a plan, according to Cerulli Associates data.

"Now that sponsors will have a full accounting of their 401(k) fees with fee disclosure, many could be left wondering if they are paying too much. Our goal is to make it quick and easy for employers to review their company’s 401(k) plan and determine if they’re getting a good deal, or should consider a change," said Stuart Robertson, 401(k) general manager at ShareBuilder 401k, a subsidiary of Capital One, which provides 410(k) plans for small and midsize businesses.

ShareBuilder 401k has introduced new tools that make it easy for companies to calculate the fees they and their employees are paying to determine whether or not those costs are reasonable.

The first implementation deadline for plan providers is July 1, when 401(k) companies are required to send disclosure statements to all employers.

Roberston explains how the new fee disclosure regulations will impact your business.

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What is the significance of the new 401(k) fee disclosures?

Robertson: The disclosure’s intention is to ensure that every business owner or person running the 401(k) plan has a full understanding of all the costs and expenses for the business, but also for the employees.

Previously over half of owners either didn’t understand or misunderstood the costs of their plan. Now they’re going to have this really helpful [document] to help their fiduciary duty to run the plan in the best interests of their employees. Owners will have a clear accounting of their costs so they can determine if they have a fair priced plan or not.

What we’ve seen in the small and mid-size markets is many times the employees are paying 2% [of assets]. We believe it should be at 1% or less. [Business owners] may pay some of the recordkeeping administration, they may not. It depends on the size of the plan. On new plans, generally the business will pay some of those administration expenses but it’s more common to see that passed through to the employees.

Why is August 30 also a significant date?

Robertson: Now that the employer knows the cost of the plan, employees will know what they’re paying. As of August 30, they will get a break out of what they pay from the provider itself. The onus of the regulation was on the providers.

Is the information being provided new information or was it just hard to find information previously?

Robertson: It’s being provided for the first time all in one document. In the past you may have been able to pull it all together, but it was very difficult. Will the new requirements be helpful to business owners or just provide one more headache to deal with?

Robertson: It should be very helpful. Now they can truly understand the cost of their plan and do their job. It’s really hard to say what the right plan for the business is if they don’t understand the costs. I think it’s a big win for owners.

Do you think that the new rules will be enough to make some business owners eliminate their plans altogether? Or at the very least change plan sponsors?

Robertson: In the small to midsize [market], that is where you’re going to see the most disruption because they’re the ones that had typically the higher price plans. Larger [companies] have a lot more professional and purchasing people to evaluate the plan. But on the smaller end that hasn’t really existed.

What can business owners do with the new information that would help run their business more efficiently?

Robertson: The bottom line is they want to give themselves and their employees a good shot at a meaningful amount for retirement — 1% vs. 2% can be hundreds of thousands of dollars over their career. Now they have the potential to get a much more powerful plan for their employees.

We’ve always been a big advocate of this regulation. Try to keep it simple: look at the fees and stay [with] low-cost funds. It will be better in long run.

This article was republished with permission from TheStreet.


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