New Fee Disclosure Rules

By • on December 14, 2010 • Filed under: Articles of Interest, Plan Sponsors

fee disclosure

What fee disclosure means for plan sponsors and participants

December 14, 2010 | by Robert Alexander

Fee Disclosure Background  – The Problem:

For years the retirement plan industry has been waiting for the updated regulations on new fee disclosure requirements.  Why? Because current requirements have become outdated, not providing enough guidance as to what types of fees need to be disclosed, to whom, and how often.

The fee disclosure being provided are not evident of the full cost of an investment, participants are not aware of account maintenance fees, and information provided to these participants is often too complicated for the “average investor” to understand.  The gap between those at the top of the industry (brokerage firms, advisers, third-party administrators – the “back-end” people of the industry) and those at the bottom of the industry (the 72 million retirement plan participants in the U.S. – the true source of the industry) has become too wide.  This disconnect has lead to several lawsuits against financial institutions and plan sponsors and, more importantly, lost earnings for the investors.

The lack of knowledge about the various fees involved in a retirement plan can be very costly to a plan participant, and plan sponsors.  For example, in Tibble v. Edison International, a California court determined that the plan sponsor had not met their fiduciary liability because they did not take the necessary steps to determine if institutional-class mutual fund shares were available to participants.  Institutional shares are, usually, the lowest cost of all classes of a particular mutual fund, and can save investors thousands over a long enough period – retirement accounts usually have a “long enough period.”

Final Regulations – The Solution (we hope):

The regulations (408(b)2) being finalized by the Department of Labor (DOL) are expected to go into effect January 2012.  After years of debate, advisers, plan sponsors, and service providers finally have the answers they’ve been waiting for.  The solution should bode quite well for participants and employers alike.

After January, 2012, the DOL will require service providers to provide participants with information regarding the various fees in their accounts in a simple-to-understand fee schedule; not the 100-page prospectuses that we’ve all become too accustomed to.  The new regulation states that fees & expenses associated with investment options must be broken down into percentages, including a calculation of the fee per $1,000 invested.  The goal is that the average investor will be able to understand the fees more clearly.  They are also requiring that 1-year, 5-year, and 10-year returns be shown for each investment option, alongside a comparable benchmark (such as the Standard & Poor’s 500 Index).

What does fee disclosure encompass? It’s not just the investment fees that are under the microscope, though, as those can be the easiest to find.  Virtually any & all fees that a participant may incur will now need to be fully disclosed; this includes recordkeeping & administration fees, investment advisory fees, brokerage fees, and additional management services fees.

Does your plan have an annual loan administration or account maintenance fee that’s charged to a participant account?  Do you have an investment advisor retained for participants?  They’re not working for free.  Brokerage fees for purchasing or selling a fund?  Make sure that’s clearly spelled out, too. Fees, such as these will become more apparent under the new regulations on fee disclosure.

What this means for plan sponsors and participants:

You may be thinking, “Don’t they already have to tell people these things?”  For the most part, the answer is yes, but the devil is in the details.  The main goal of the new regulations is to explain the details in a manner that the “average investor” can understand.

Hopefully when the new fee disclosure regulations go into effect in January 2012 participants will be able to determine how much their account is actually costing them.  And be able to find out if there is a way to reduce the costs of their account, which will have a direct effect on their future account balance.

Moreover, the new fee disclosure rules should assist plan sponsors’ in reducing their liability to a plan.  Sure, it may take some extra time to review the costs in a more concise manner.  But won’t the payoff be worth it?  Maybe you’ve been paying too much this whole time and reducing your own benefits, with cheaper alternatives just minutes of research away.  Maybe there’s a fee in your plan that you had no idea about.  Maybe your broker has been recommending Fund A because it pays him more than Fund B, but at the same time lowering your returns.  The new fee disclosure rules should undoubtedly allow for an apples-to-apples comparison of providers’ costs.

Finally, no more hidden fees, right?  Let’s all hope so.

Where to get more information on fee disclosure:

The Employee Benefits Security Administration (EBSA) has established an electronic inquiry system.  You can email questions or comments to e-ORI@dol.gov, or use their Federal eRulemaking website www.requlations.gov.

A free plan review can be provided by the associates of www.lowcost401k.com.  Reviews will include a breakdown of the fees you’re already paying, and comparable alternatives with lower costs.  Visit them online at www.lowcost401k.com for more information.

Articles on this site are for guidance only. No intention, however phrased, to offer investment recommendations or tax advice is intended, should be inferred, or acted upon by the reader without due diligence. No guarantee of the accuracy of the content is given or inferred. It is our recommendation and the responsibility of readers that they make their own further independent investigations before making any investment decisions.

Visit 401klibrary.com to learn more about fee disclosure and other 401k topics.

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