What you don’t know about your company’s 401(k) plan may hurt you.
By Mark Wayne
A new era of benefits transparency is about to begin. Starting on January 1st, 2012, sponsors of participant-directed defined contributed retirement plans will be required to present the fees associated with their accounts in one document that must be shared with plan participants. For most employers and HR professionals following calendar plan years, disclosure will occur on or around April 30. Preparing for the upcoming changes should be a priority.
This mandatory participant fee disclosure is the third leg of guidance on fee disclosure issued by the U.S. Department of Labor (DOL) in the past several years. New regulatory requirements for the 401(k) industry are being implemented as part of the DOL’s effort to improve transparency of the services delivered by a particular provider and what they cost. This will have significant ramifications for everyone who manages, operates, or sponsors a 401(k) plan.
Among the most important changes are new guidelines regarding participant disclosure. The new regulations will require both plan providers and employers to deliver detailed information describing plan fees and, for the first time, fees charged to participants will appear on a statement delivered each quarter. Employers need to be proactive, prepared, and informed in order to structure their plan management strategies around the new legislation and to ensure they are able to answer employee questions in the wake of the changes.
Employees will have a detailed statement of the fees they are paying. When plan participants start receiving their new disclosure statements, there will be some inevitable surprises. Studies have shown that approximately 80 percent of 401(k) plan participants actually think their plan is free! Statements showing money coming out of their paychecks will be an unwelcome revelation to some. An even more startling statistic is the fact only one third of employers are actively preparing for the new participant fee disclosure regulations. Transparency is a good thing in the long run, but there will be a period of adjustment once the legislation goes into effect.
Ask your plan provider for a sample of the fee disclosure statement. If there are five different 401(k) plan fees that will be shown to your employees, you need to build a communications strategy around each one of the fees. What is the dollar value of that fee? Why is it important to the employee? What are the benchmarks? What value/service are they receiving in return for those fees? Once you have that information in hand, think about how employees will react—the types of questions and concerns they are likely to have and if you are prepared to address them. Ensure that HR professionals and members of the corporate leadership team will be able to answer questions with certainty and credibility.
Getting the Most for Your Organization
What types of questions should employers and HR professionals ask their plan administrators in order to optimize the experience for their organization? This is an opportunity to make changes to an existing fee structure or renegotiate the terms of an existing arrangement with your provider. It is one thing to explain to a participant that their fee is 1 percent of plan assets, but employers also need to be thinking about how to benchmark that fee, and should feel comfortable asking their provider for market data so they can make comparisons. Do not be afraid to ask for data that will help participants understand and value the services they are getting for that 1 percent deduction.
Administrative nuances and realities are not always obvious, and a little explanation and transparency can go a long way.
While participation levels and average deferred percentage are common metrics, one statistic that is not often discussed is the percentage of employees on target for successful retirement. This is a vital—and all too often overlooked—question.
Determining how successfully your firm and your employees are meeting this goal is essential to improving the program and bolstering employee satisfaction within that program. From an HR perspective, improving the on-track percentage can help maintain a structured flow of organization attrition. Helping experienced employees retire on time and on budget will likely improve employee engagement. Employees who are not worried about retirement and other financial factors are better able to focus on their day-to-day workplace priorities.
Protect Yourself and Your Employees
How are your employees protected from today’s market volatility? To determine if you are doing all you can to help your employees take advantage of their 401(k), evaluate your organization by answering two questions:
• Are employees receiving sufficient investment choices?
• Are employees getting quality investment advice and direction?
Managed accounts and sophisticated asset allocation programs can help ensure that the answers to those questions are in the affirmative. There has been a lot of discussion and positive chatter about the benefits of auto enrollment and auto escalation, but it is important to remember that both are only the beginning. Putting that structure in place is a necessity. The next question is how to improve the education process and start ushering employees to make better and more strategic decisions.
Prior to April 1, 2012, it is ideal to review your investment lineup and confirm that it is optimally designed and built to protect your employees. Look at existing plan funds, compare them against benchmarks, and implement oversight framework to monitor those funds going forward. If your provider is not a fiduciary, they should not be doing your investment review, as it is less likely that they will be objective in their evaluations. An independent consultant can conduct a thorough review of your existing 401(k) plan, especially the fee structure. A significant percentage of existing plans include underperforming investments, and a review can protect not only your employees, but also yourself by minimizing chances of incurring costly penalties and unnecessary exposure to avoid liability.
It is important for employers not only to prepare for the changes that are currently in the pipeline, but also to keep their ears to the ground with regard to new regulatory and legislative proposals. In response to industry feedback and commentary, the DOL withdrew proposed regulations that would have redefined fiduciary and imposed strict new regulations regarding potential conflicts of interest. But that proposal is still being worked on, and will likely reemerge in the future.
The legislative landscape of individual retirement account regulation is complicated by the fact that there technically isn’t a governmental entity that governs IRAs. While process might be somewhat jumbled, employers cannot afford to be. It is important to have information in order to make the April 2012 transition a smooth and successful one for all parties.
Mark Wayne is president and CEO of Freedom One Financial Group.