Retirement plan sponsors, such as companies that offer 401(k)s and other qualified retirement plans, have the responsibility under the Employee Retirement Income Security Act of 1974 to understand the costs of servicing their plans and ensuring that the costs are reasonable.
Because of the way this industry has evolved, fulfilling this responsibility has not always been easy. Many of the fees associated with servicing qualified retirement plans are passed from investment providers, such as mutual fund companies, to service providers, such as financial planners record-keeping firms and third-party administrators, without being fully disclosed to plan sponsors or participants.
This revenue-sharing has historically been made through tools such as 12b-1 charges paid to brokers by mutual funds as well as other administrative or sub-TA fees paid to other service providers, such as recordkeeping firms. Consequently, these charges have existed for many years, silently impacting participant returns and plan costs while embedded in the fund’s expense ratio.
The Winds of Change are Blowing
This lack of transparency from a fee standpoint in the retirement plan industry are expected to change radically over the coming months, thanks to new regulations currently under consideration by the Department of Labor and fee disclosure legislation being considered by Congress.
The US House of Representatives had approved retirement plan fee disclosure legislation as part of fee disclosure provisions of the American Jobs and Closing Tax Loopholes Act that, as of June 17th, had been dropped by the US Senate. The Senate’s preference appears to be to allow the Department of Labor to take additional time to develop regulations around the disclosure and transparency in pension arena. Regardless of the date, retirement plan fee disclosure and full transparency is coming to the industry. And both plan sponsors and their professional advisers need to be prepared for these changes.
In an effort to bring additional transparency and efficiency to the retirement plan marketplace, several companies are working to build comprehensive online rating databases using publicly available information regarding the nation’s qualified retirement plans. One of the most prominent of these companies is BrightScope Inc., San Diego, Calif. To date, BrightScope has more than 30,000 pension plans rated and a robust fee benchmarking platform.
The pension service provider community has also been working to create tools and reporting in anticipation of requirements to offer fee transparency and disclosure to plan sponsors and participants. Service providers, including large fund complexes and record-keeping platforms, are building online fee disclosure reports and tools that can provide plan-level fee disclosure to plan sponsors, plus customized, participant-level fee disclosure reporting.
If you are a service provider working in the defined contribution plan space and offering plans such as 401(k)s, full fee transparency and disclosure to plan sponsors and participants will be a new reality in the near future because of the changing regulatory environment. And large service providers are preparing for this change.
So here is a question that we need to ask ourselves as service providers: Are we ready to have this discussion with (1) corporate clients that have retained us as investment consultants on their company-sponsored pension plans; and (2) with participants who may challenge us regarding the fees that will be disclosed to them?
As an investment consultant working with company-sponsored retirement plans, have you carefully considered your compensation on the plans that you’re servicing and whether that compensation is being paid from plan assets or by the plan sponsor? Furthermore, are you prepared to justify these costs for your services relative to the value that you’re adding as an advisor to the company sponsoring the plan and the plan’s participants?
Remember, in the near future all costs (including advisor compensation) will be disclosed and reported to the plan sponsor on a systematic and ongoing basis. Additionally, retirement plan sponsors and participants will be able to easily access publicly available, online databases where they can obtain a significant amount of operational data about their plan and independent ratings.
These services will also allow companies to benchmark their plans relative to comparable retirement plans around the country. This amazing level of transparency and disclosure on a national basis will create interesting opportunities and challenges for retirement plan sponsors and their advisors. Get ready for the winds of change, because they are certainly blowing.
R. Dean Piccirillo, CFP, CRPS, AIFA is a principal and senior financial advisor at HBK Sorce Financial, LLC, Albany, N.Y. You may e-mail him at [email protected].