Your company has celebrated its wedding with the new 401(k). Time to manage the marriage.
By Mark Wayne
Change is no longer on the way—it is officially here. The new regulatory requirements mandating significant changes in the way 401(k) plans are managed and administered are in full effect, and anyone who participates, manages, or sponsors a 401(k) plan has certainly noticed some big differences.
Organizations have been taking steps to educate employees and communicate with them about the changes. At the same time, they have been meeting new disclosure, transparency, and reporting responsibilities.
For plan sponsors, the next steps are arguably the most important: Evaluating new service provider disclosures, integrating that information into choices about plan structure and administration, and conducting an internal analysis to ensure that the details of any 401(k) program are living up to the standards established under the new rules.
The position many companies find themselves in today is not unlike a couple shortly after their wedding. Even if everything goes well on the big day, the day-to-day realities of making a marriage work require a more sophisticated and nuanced skillset. Now that the honeymoon is over, HR professionals and executive decision makers need to actively ensure that they make the transition. They must ensure that their 401(k) plans are structured, priced, and administered in a manner that fulfills organizational obligations under the new rules.
The new regulations require both plan providers and employers to provide detailed information describing plan fees. Many employees will soon discover that, for the first time, they have access to a detailed account of the plan fees deducted from their account, presented to them on a quarterly statement.
In the past, surveys have revealed that as many as four out of five plan participants were under the mistaken impression that no fees were associated with operating their 401(k) plan. New statements will almost certainly clarify that notion, helping employees to understand the fees and services they are paying for, and the overall effectiveness of the 401(k) program. To that end, plan sponsors will need to evaluate their plan to ensure the fees are adequate. That is where the disclosure rules outlined in the new 408(b)(2) Employee Retirement Income Security Act (ERISA) come into play. The 408(b)(2) regulation reaffirms employers’ responsibility to select and monitor quality service providers, and ensure that the fees charged are commensurate with fair market value of the services being provided.
More clarity and transparency is a good thing. Obtaining a more sophisticated understanding of the structural, financial, and functional details of your 401(k) program is also a good thing. But it is not going to happen automatically; it requires HR professionals and executives to be active and take the next steps necessary to evolve from a period of transition to a healthy and sustainable long-term 401(k) program.
With abundant warning and solid planning, most firms have managed to navigate the first stages of the transition to the new regulatory regime relatively successfully. The logistics of new reporting have been ironed out—or will be before too long. However, what many firms might be less prepared for is evaluating the degree to which these changes will require them to meet new standards for compliance. And this is something that they cannot afford to ignore, because it is one of the most prominent features on the new regulatory and compliance landscape.
So while the legal requirement for sponsors to conduct due diligence might not have shifted dramatically, the reality is that there will be new expectations. The 408(b)(2) regulation permits “reasonable” service arrangements and a “reasonable” fee structure. Fortunately, confirming this standard also makes good sense from the employers’ perspective, because they want to make sure that their plan is both operationally effective and also cost effective.
Soliciting competitive bids can be expensive, time-consuming, and an inefficient process. Evaluate your organization’s plan through the use of industry benchmarks. An independent consultant can also deliver a thorough review of your existing 401(k) plan’s performance and fee structure. A reputable independent consultant can also assist with a review of your existing investment lineup and determine if it is optimized and operating in your employees’ best interests. Far too many plans include poor performing or underperforming investments.
As employers engage in this review process and carefully evaluate the merits of their existing 401(k) plan choices, they should also be unafraid to ask important questions about what they are getting for their money.
• What services are being rendered in exchange for your fees, and are those services delivering adequate value?
• Are employees’ interests being protected, and are you doing your best to deliver reasonable standards of efficiency and fiscal responsibility on their behalf?
• Do the benchmarks provide a relevant and appropriate comparison?
Once you can answer those questions confidently and effectively, you will have taken that enormous and all-important next step forward.
Mark Wayne is president and CEO for Freedom One Financial Group.