The 2012 calendar year brought sweeping changes to the retirement plan industry. 401(k) practitioners and recordkeepers devoted most of the year to developing, implementing and distributing fee disclosures pursuant to Department of Labor Regulations 408(b)(2) and 404(a)(5). Lots of paper was generated, but just how effective were these new disclosures at familiarizing plan participants with who, what and how much they are paying to maintain their retirement accounts?
Burke Group’s participant service center handles thousands of calls from retirement plan participants each year. So far, we have not experienced a groundswell of questions or complaints from participants even after quarterly statements were revamped to itemize and disclose certain individual account fees. In fact, there has been an unexpected silence since the disclosures were distributed.
The model notices issued by the Department of Labor were cryptic, overly wordy and not easily understood by the average reader. It is not likely that participants spent enough time reviewing their notices to conclude that, despite their belief, the 401(k) plan is not an entirely free benefit. Perhaps there was a better way to structure the notices to get that point across?
Regardless, the pressure is building and plan sponsors should be prepared for questions from plan participants. As fiduciaries, plan sponsors must be able to prove that plan expenses are reasonable if and when they are challenged. The only true way to do this is through a complete analysis where quotes are obtained from several retirement plan providers and a side-by-side comparison of fees is performed.
Understand that just because a provider search may ensue, it does not mean the incumbent will lose their seat at the table. According to the 2012 PLANSPONSOR Survey, the number of respondents who have stayed with their provider for more than seven years has grown – from 40.2% in 2010 to 51.7% in 2012. Through the comparative process, quality service is the differentiator and unique features and functionality become more apparent. Often a renegotiation of fees will take place and valuable services will be added for the benefit of plan participants.
In order to be prepared for increased scrutiny of plan expenses, plan sponsors should proactively take these steps:
- Determine how much indirect compensation or “revenue sharing” is paid to the plan’s provider/recordkeeper in addition to any hard dollar costs. Inquire about setting up a revenue recapture account.
- Find out if lower priced versions of the investments are available and determine if the provider/recordkeeper could continue to provide services with less revenue sharing.
- Obtain quotes from other providers and complete a benchmarking analysis to determine if the current arrangement is the most advantageous. Remember that cheaper is not always better.
- Don’t be afraid to hire an independent party to perform this analysis.
As a rule of thumb, total plan expenses (recordkeeping, trustee and investment) should be below 1.50% of total assets – preferably under 1.00%, depending on plan size. If your total plan expenses are 1.50% to 2.00% of total assets or greater, chances are the investment expense is abnormally high and the opportunity exists to lower plan costs, for the exclusive benefit of plan participants. This is often the case if the provider/recordkeeper has a proprietary fund requirement.
In a roundabout way, the Department of Labor has achieved its short-term objective – to increase awareness and scrutiny of retirement plan expenses. Although participants may not be asking many questions now, plan sponsors who show some initiative will be prepared when they do. Don’t wait too long to ask yourself who, what and how much are we paying?