Timely Reminders on Participant Disclosures
Ever since last February, when the U.S. Department of Labor (DOL) finally issued its “final-final” ruling on revised disclosure regulations, August 30 has loomed large on the 401(k) calendar of events: the day by which the vast majority of plan sponsors owe 404(a)5 disclosure reports to their plan participants. Are you ready?
1. Fees – Are you familiar with all of your plan’s fees, as disclosed to you from your providers earlier this summer according to separate 408(b)2 disclosures?
2. Relationships – Do you know which plan providers (and any of their third party relationships) are being paid what from those fees — and can you explain what each provider is doing for your plan in exchange for the costs incurred?
3. Comparisons – Have you completed objective benchmarking against other, similarly sized plans to ensure your plan’s fees are reasonable for services provided?
Even now that August 30th has come and gone and your 404(a)5 reports are all out the door, if you answered “no” to any or all of these questions, your plan sponsor duties are not yet over. In fact, in some respects, they’ve only just begun. August 30 was not only the date by which you owed your plan participants increased fee disclosures, it was also the date after which you may need to answer their questions about whether and how those “new” costs (newly visible to them, anyway) are in their best interests.
Why is this important? First, the vast majority of retirement plan participant litigation against employers is about fees charged in the plan. Second, feedback from recent DOL audits indicate that auditors are spending a good half of their time grilling sponsors about plan fees. Lastly, the popular press is educating employees about the consequences of overpaying for fees. It may not be long before the press is educating employees about successful employee actions against their employers for allowing excessive fees in their company retirement plan.
As I described in a previous blog, “Plan Participant Fee Disclosures,” according to a December 2010 AARP survey, 71 percent of participants in the survey claimed that they did not pay any fees at all. Imagine the uncomfortable explanations you may have in store if you’ve not yet taken steps to document that your participants are paying reasonable plan costs. Doing the math among an estimated 72 million participants, multiplied by 71 percent who seem to think they’re getting a free lunch, that represents approximately 51 million potentially angry employees awaiting well-informed answers from their employers.
Here is a sample of a few recent articles in the popular press (with links where available to non-subscribers):
The Wall Street Journal, Getting the Most From a Lame 401(k) Retirement Plan,” October 8, 2011.
Los Angeles Times, “401(k) fees could reduce average nest egg by 30%, study says,” May 29, 2012.
Consumer Reports, “Fees skim big bucks from 401(k)s,” July 2012.
USA Today, “New 401(k) statements disclose management fees,” August 19, 2012.
The New York Times, “The Curtain Opens on 401(k) Fees,” June 2, 2012.
As The New York Times article opined, “It may just be that when workers begin to see how investment fees and administrative costs are ravaging their retirement savings, they’ll start prodding the managers overseeing these plans to behave like the fiduciaries they are.”
By postponing your careful review and documentation of the plan costs your participants are incurring, you risk not being able to answer participant questions regarding the costs of managing their 401(k) benefit. Especially given that awards against plan fiduciaries are personal liabilities, plan sponsors should not underestimate the importance of having a solid answer to employee inquires.
Are you ready?