Financial Advisers Prepare For New 401(k) Reporting Rules
Do you know how much your company’s 401(k) retirement plan is costing your business and its employees in fees and charges?
If you don’t, you may soon find out.
New regulations scheduled to take effect next year will require financial institutions that offer 401(k) plans to report fees associated with the plans in greater detail. Employers who sponsor 401(k) plans must also make that information available to workers.
Some financial advisers expect that making fee disclosures more readily accessible to plan participants could cause an uproar from people who have 401(k)s and the businesses that sponsor them, especially for those who may not have been paying attention to the fees.
“For some people, this could be alarming,” said Stephen Cunha, a retirement planning specialist at Baystate Financial in Worcester. “Our sense is these new regulations are going to create a lot more discussion in the industry.”
Changes Afoot
In October 2010, the U.S. Department of Labor issued the final regulations.
One of the new regulations, ERISA 404(a)(5), which refers to the section of the Employee Retirement Income Security Act that lays out these new rules, will mandate 401(k) administrators to give detailed notices each quarter of fee structures to tens of millions of participants in their plans.
While customers have always had access to this information, putting it in front of them in an easy-to-digest fashion will highlight the issue of how much customers are paying for the plans.
With recent turmoil in the stock markets and many retirement plans losing money in recent years, Cunha said financial planners could start facing backlash from customers, or at least questions.
However, 401(k) plans, in general, have rebounded positively in recent quarters. According to an analysis by Fidelity Investments, 401(k) plan assets, on average, lost 26 percent of their value between 2007 and 2008 during the depths of the recession. But in 2009, plans regained 22 percent of their value. Fidelity’s most recent figures show that from the first to second quarters of this year, plans gained a modest 1 percent.
Even if plans are performing well, Cunha said some employees or businesses that haven’t been aware of the 401(k) fees may be in for a shock when they see them.
Earlier this year, Dalbar Inc., a Boston-based retirement services study group, released a report outlining the requirements. It found that 83 percent of 401(k) participants were unaware of the fees associated with their accounts. Increased awareness of fees, Dalbar predicted, could create downward pressure on financial institutions to lower fees, or force them to provide additional services in exchange for them.
The report said the disclosure of the fees could “awaken a sleeping giant” of customers.
Not So Fast
But other financial analysts aren’t expecting anything too drastic.
“I do think that a notice of what fees are associated with plans will surprise some people,” said Paul Mauro, owner of Legacy Financial Advisers in Westborough. “But there’s also not much that can be done about it.”
If 401(k) plans are offered to workers by their employers, it’s difficult for the employees to unilaterally opt out of the programs and switch to another firm, while still having it sponsored by their employer.
But Mauro said it’s important for consumers to be aware of costs related to any financial plan.
So, how does a business know what a reasonable fee is for a 401(k) plan?
Dalbar gives some “rule of thumb” guidelines: Fees within 20 percent of industry averages are considered reasonable. But there’s a wide variety of fees because there are so many variables that go into how much the fees will be, said Dalbar President and CEO Louis Harvey. The number of employees in the plan, asset size and type of investment are all factors that influence fee amounts. For a plan with total assets of less than $1 million, an industry norm would be 1.89 percent of the plan’s size, he said, while one with more than $500 million normally has fees of around 0.41 percent.
Edward Lynch, founder and CEO of Fiduciary Governance LLC in Waltham, an independent financial consultancy, said business owners can do their own research or hire a consultant to determine if the fees on their retirement plans are reasonable. He said that in some cases, when fees are discussed with a financial adviser, the customer can either get lower fees or increased service.
Overall, Ed Ferrigno, vice president of Washington affairs for the Plan Sponsor Council of America, which represents businesses that offer retirement savings plans to employees, warns against businesses and employees making major changes just because of the fees.
“Consumers need to understand, there are costs associated with operating a plan,” he said. “It’s being actively managed, which has to cost something. Nothing is free.”
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