If you need help figuring out new Department of Labor rules for 401(k)s, you’re certainly not alone. The department’s highly publicized Rule 408(b)2, which dictates fee-transparency and was instituted over the summer, is now in full swing. Assisting curious clients about the true costs of their retirement plan can be time consuming, and there’s always the possibility of getting it wrong.
Open architecture 401(k) provider Lincoln Trust Company introduced its Personalized Expense Ratio Calculator (PERC) on Tuesday, an online tool that helps participants in any 401(k) plan determine what they’re really paying for the privilege of saving.
“We’ve taken a report that we previously provided our clients and now allow outside parties to plug in the same type of information to get an idea of what they’re paying for their plan,” said Tom Gonnella, executive vice president of Lincoln Trust. “It should be pretty powerful information for them.”
The PERC, available on the Lincoln Trust Website, walks investors through a five-step process to calculate and benchmark the real cost of their 401(k) plan. That sounds great, but with a plethora of online calculators available to help with everything from how much a client will need for retirement to a suitable withdrawal rate, how does this one stand out?
"There’s really two fronts on which these required [DOL] disclosures have failed,” Gonnella responds. “The biggest by far is the investments. A Deloitte study finds that 84% of plan costs are within the investments. Nowhere in the regulations do they get specific around the investments, other than calculating per $1,000 what your expense ratio would be. That doesn’t even get close to what the participant, in particular, or the plan sponsor would need to understand.”
The second failing is that there is no benchmarking requirement.
“If the participant does all these calculations and says, ‘I’m only paying 2% for my retirement plan. That sounds pretty good,’ when they realize the benchmark for that size plan was 87 basis points, they might think very differently about their fees. So we really hone in on those two points.”
Gonnella adds the only documents that a participant needs in order to utilize the calculator are their third-quarter statement and the annual participant fee disclosure provided a few months ago.
As for DOL rules in general and the potential for more regulation of the 401(k) space, he calls the latest rules “1.0” and there “will definitely be a 2.0”
“I lobby quite a bit in Washington on behalf of the independent 401(k) industry,” he says. “Every year we talk in front of the Department of Labor, and I’ve been very vocal about pointing out these deficiencies. To their credit, they’re looking for the feedback. They get it; let’s say that. These aren’t dumb people. I think they understand it. I think the challenge for them is they have a lot of constituencies that they’re trying to please.”