In the first post of this series, I reminded business owners and 401(k) plan sponsors that new fee disclosure laws, years in the making, are around the corner. I stressed the importance of not taking these changes lightly, providing examples that reflect a shift in the legal landscape surrounding defined contribution plans. Finally, we concluded that the perception of your plan – and as an extension your entire operation – may be affected adversely by these changes if you aren’t ready.
Now, let’s review the 3 separate disclosure deadlines and how a business can prepare:
1) By July 1st: Plan sponsors should receive fee disclosure data from investment partner.
2 ) By August 30th: Plan sponsors should disclose plan facts and investment fees to participants.
3) By November 14th: Plan sponsors issue third quarter account statements which will disclose all fees for the first time.
It is widely believed that the third item may trigger “sticker shock” when participants - for the very first time – will see Representative fees, administrative fees, distribution fees, expense ratios et cetera, in black and white. Surveys conducted by AARP in recent years have revealed that most participants in 401(k) plans are not aware that they pay any fees at all!
While these new rules are expected to ultimately benefit employees by driving down fees, this “creative destruction” can present a real distraction to a small business. Here is an abbreviated to do list for an HR professional or business owner:
1) Get the message out now: The worst thing you can do is let your employees discover these fees for the first time when they open their statement in November. While some industry experts are predicting it won’t be a big deal because most participants don’t read their statements at all – I say: why risk a negative? And I would imagine that your alert participants do read their statements, therefore I suggest you communicate what is happening in advance.
Have you communicated with your employees about 401(k) fees and the changes coming with the November statement yet?
2) Remind employees of the 401(k) benefits: Notwithstanding the mess we find ourselves in, there are still significant benefits to having a plan: a potential match, tax deduction/deferral, A ROTH option….and hopefully: broad investment choices, reasonable fees and a competent financial advisor. (If you don’t have the last three, feel free to reach out to me ASAP)
How good is your plan relative to your competitors? Have you reminded your employees of your plans benefits recently?
3) Synch up the lingo: The Department of Labor has developed annual and quarterly notice models, which contain valuable information – of course in a dense and technical format. Try to align these terms with your current employee communication about the plan, to increase understanding and transparency. See if you can embed definitions of administrative and investment fees in all of your communications to employees.
Have you tried to simplify the DOL lingo in a manner your employees can understand?
Having been in this business for 23 years, I always sensed that retirement plan providers – and employers by extension ( aware or not) - were selling their participants short, in terms of what it was costing them to participate in the plan….and how all of these costs were buried and undisclosed.
Hence, this is a positive change for participants (consumers) of retirement plans as it will increase transparency and (hopefully) help the retirement industry to transform into one that is more service and less sales oriented.
But on the flip side, these changes are likely to catch many plan sponsors and business owners off guard!
If you are a business owner or responsible for a 401(k) plan – you can get ahead of these changes by holding a meeting and being straight forward with your participants right about now.