Is it so hard to simply state how much money an employee is paying to participate in a 401(k) plan?
The answer is apparently yes—despite the final adoption last month of the Department of Labor’s ERISA 408(b)(2) fee disclosure rule. While retirement plan service providers are required to provide usable, accurate and complete information about how much compensation they are taking from plan participants, many are skilled at nevertheless burying that information in opaque disclosures and may be relying on DOL’s history of spotty enforcement.
“Many firms are doing nothing and hoping that nobody will come knocking at their door,” says Lou Harvey (left), chief executive of the Boston-based consulting firm Dalbar.
That is why Research Magazine, AdvisorOne and Dalbar are teaming up to cast a brighter light upon the shadowy world of retirement plan fee disclosures by exposing service providers who make it hard for plan sponsors to fulfill their fiduciary obligations, while giving due acknowledgement to those who are models of transparency.
“The Labor Department literally said that the ultimate responsibility is on the plan sponsor to demand the information that they need,” Harvey told AdvisorOne.
Over the next several months, Dalbar will conduct the study, which will analyze and rank the transparency of disclosures, the results of which Research and AdvisorOne will simultaneously publish at the start of the new year.
Financial advisors—as well as plan sponors, third-party administrators and record keepers—are invited to submit up to three different service provider disclosures, which Dalbar will analyze at no cost to those making the submission. Submissions can be e-mailed to [email protected].
The financial services market research firm’s analysis will consider the transparency of the disclosures with respect to the services provided, the value of the services to participants and the total participant costs. Additionally, the analysis will evaluate the clarity with which potential conflicts of interest are presented as well as overall helpfulness and understandability of the disclosures.
The ERISA rule’s purpose of protecting investors from service provider abuse through clear disclosures can be frustrated by service providers who deliver that information in an opaque way. For example, a service provider might list fees in such a way that the plan sponsor has to go to a variety of sources (such as fund information supplements or service agreements) and then add various results together.
In contrast, a transparent plan will break out the costs for plan sponsor services (and describe those services), employee services (and describe those) and administrative services (listing those), then convey the financial impact of those services and costs in a way that is easy for plan sponsors to evaluate and compare with other plans.
That kind of transparency would enable plan sponsors to carry out their fiduciary duty and ensure that the services offered are necessary, reasonable and cost effective. The fee disclosure transparency ratings, when published, will provide advisors with concrete basis to recommend a service provider to their plan sponsor clients.
“The plan sponsor community has an obligation and has an interest in understanding what the fees and costs are despite the opaqueness of some of the disclosures,” Harvey says.