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November 23, 2011 at 07:00 PM
In 2012 two new fee disclosure regulations will take effect for 401(k) and similar retirement plans. These new regulations were issued and will be enforced by the Department of Labor (DoL) and the IRS.
The first to go into effect requires plan sponsors to evaluate mandated disclosures from their service providers. The second requires plan sponsors to make certain other disclosures to employees and plan participants. These regulations are intended to result in better decisions by plan sponsors and participants through completeness and greater clarity of information.
The response from the industry to these new regulations has varied widely, largely driven by the interests and motivation of the firms involved. Many firms have focused on supporting the goals of the regulations while others seek ways to circumvent them.
Advisors who are educated about these regulations and practices are in a position to guide clients through the maze of new requirements and defeat the efforts to circumvent their intent.
Certain firms treat the new fee disclosure regulations as being no different from previous experiences, but many others recognize fundamental differences that will reshape the retirement industry during the next decade. Consider some of the differences:
Existing methods cannot be used to comply since regulations require that plan sponsors affirmatively evaluate the sources they usually rely on for compliance. Current sources are therefore disqualified and plan sponsors must find new ways to comply.
The new regulations involve multiple communications with an estimated 72 million people. No other retirement regulation has ever affected so many people, not even Social Security. With all this activity it takes only a tiny percentage to cause big waves.
For the first time plan sponsors have a credible recourse if service providers are not forthright with fees and expenses charged to the plan. New regulations provide a vehicle to report service providers to the DoL/IRS. Plan sponsors can now leave it to the government to prosecute errant service providers.
Detection of failures to comply is virtually certain for any plans that are audited. Past audits could not deal with reasonableness because there were no specific rules to enable examination. Additionally, there is expected to be so much press that large numbers of plan sponsors will understand the requirements. There will be nowhere to hide.
New regulations and the threat of penalties give aggressive competitors the opportunity to win business from incumbents who are lax regarding the new regulations. Competitors will use every opportunity to win business.
Denial
The largest category of responses is broadly described as denials. Some firms deny the onset of a fundamental change. They are often motivated by the desire to maintain the status quo in which plan sponsors and participants are blissfully unaware of the compensation being paid for the services received.
Denial is often evidenced by the argument that fees are not hidden and that plan sponsors and participants know what fees are paid. This argument is contradicted by vast amounts of research and the fact that fees are presented in a way that makes it difficult if not impossible to answer the simple question, “What is the cost?” with a single dollar figure. For the most part, fees are hidden in plain sight!
