Workplace Retirement Plans – Exposing Fees, Finally
I have a confession to make. After years and years of discussing retirement plan features with new and old employees, I never once spoke of plan fees. Not during new hire benefits orientations, one-on-one information sessions, or group training sessions. I never even had a conversation about retirement plan fees with an employee benefit colleague, my supervisor, or the Chief Financial Officer (CFO). I did once have a conversation over dinner about plan fees with a third party administrator trying to get our company's business.
I'm making this confession because it wasn't until a few years ago that I realized the poor service I was providing in this area to employees. I considered fees in my own portfolio but I never once in my career thought of incorporating fee information into my discussions with employees. But all of that changed when the U.S. Department of Labor (DOL) passed regulation 408(b)(2) mandating annual fee disclosure notices for employees participating in workplace 401(k)-style retirement plans. And now retirement plan fees are all I want to talk about. For me, it is the biggest game-changer in workplace retirement plan administration and education.
What is Fee Disclosure?
DOL Regulation 408(b)(2) amends the Employee Retirement Income Security Act (ERISA) of 1974. It requires covered service providers (e.g., third party administrators and their subcontractors) to retirement plans to reveal information about their compensation. The goal is to help plan sponsors (e.g., employers) determine if the compensation is reasonable and identify potential conflicts of interest. The regulation went into effect on July 2012. And for the first time ever, employers and employees received a singular fee disclosure notice from their retirement plan. Up to this time, fee information was included in plan documentation such as a fund prospectus. You know the documents that no one ever downloads, requests or reads.
Now the new fee disclosure notices are not perfect. The fee information is still not in one easy to read document and most employees are not likely to read them. But employees are likely to hear about these notices because of the enormous amount of attention plan fees received from the national media. Major newspapers and magazines publish articles about it, and popular television shows discuss it periodically. Americans may never take the time to figure out how much they are paying in fees, but they now know they are paying them. Before, most did not…
Role of Benefits Professionals in Fee Disclosure
Before mandated fee disclosure notices no one was talking to employees about fees. I am not the only benefit pro in need of confession. Fortunately, the new fee disclosure regulation gives others and me an opportunity for redemption.
Fiduciary and administrative role –
By mandating annual fee disclosure notices the DOL is sending a message to plan sponsors that they must monitor plan fees and choose reasonably priced retirement plan services and funds. Instead of meeting with third party administrators to discuss fund performance only, benefit managers need to discuss how the funds’ fees compare with other, similar funds. Failure to compare fees for services and funds can result in legal action against employers by employees who do take time to compare fees on their own.
Educational role –
For all but a very small percentage of diligent employees, fee disclosure notices will go unnoticed. This is all the more reason benefit professionals need to step up their retirement plan fee education game. To help employees understand how fees impact their retirement savings, benefit professionals can offer the following educational services:
- Include a sample fee disclosure notice in all new hire benefit packets and review it with new hires during the live orientation
- Incorporate retirement plan fee information into every retirement savings education effort, including meetings, plan brochures and web-based information
- Include an explanatory statement about retirement plan fees on Compensation and Benefit statements, if provided
- Provide access to online fee comparison tools: FeeX, BrightScope, Plan Advisor Tools, LPL Retirement Partner’s Fee & Analysis Evaluation, AHC Advisors, Inc., Fee Calculator
Retirement services providers don’t work for free and mutual funds don’t manage themselves. These services cost money. Unfortunately, and for too many years, these retirement plan service providers did not provide a receipt for the money they received. The DOL says they must now provide that receipt annually in the form of a fee disclosure notice.
Employee benefit professionals have a huge role to play in making sure that employees understand their fee disclosure notices and how plan fees impact retirement savings. The question is, will they…?