Communicating retirement plan value to participants in the wake of fee disclosure
After much anticipation, the date has arrived: As of August 30, 2012, the Department of Labor requires fees to be consistently disclosed to all eligible employees, participants and beneficiaries of retirement plans subject to the Employee Retirement Income Security Act. This positive movement has precipitated an increase in consistency and transparency of communication to plan participants.
Currently, many plan participants are not sure how much their retirement plan costs or what value they receive in exchange for fees. In fact, some participants have been unaware that they are paying fees. The new fee disclosure rules will prompt some participants to focus on retirement plan services and fees for the first time.
As a result of the new disclosure requirements, participants will see the additional information about their retirement plan fees in numerous places, including annual disclosures of plan features/services and fees that may be charged, comparative charts of plan investments, a glossary of terms, websites and quarterly fee information on participant statements.
Hopefully by now, most plan participants have been made aware of these upcoming disclosures through proactive communication efforts by plan sponsors and service providers. Many will know what to expect. But for some, these fees will leave a few unanswered questions regarding the value of their retirement plan.
Helping Participants See the Big Picture
In our view, plan sponsors should not see fee disclosure as a negative development that requires defensive measures. Rather, we think plan sponsors are now faced with a unique opportunity to command participants’ attention, as they proactively communicate the positive impact of fee disclosure and the value of the retirement plan benefits that they offer and help participants fully understand what the fees are paying for.
In these difficult economic times, with unprecedented budget deficits and the future of government programs such as Social Security and Medicare seeming uncertain, employer-sponsored retirement plans are becoming ever more important to Americans’ retirement security. Now is an opportune time to remind participants of this and show them how valuable this benefit is.
Fees are nothing new. Rather, plans and their providers are now showing participants fees that already exist in a more transparent and consistent way. Although the plan fees can and should influence investment and retirement planning decisions, they’re only one part of a much bigger picture. A comprehensive retirement plan is comprised of much more than the numbers seen on a statement or chart.
Rather than focusing on the fees or reacting to participant questions about fees, sponsors are well-served to engage in a proactive and comprehensive communication strategy that not only anticipates participant concerns, but that emphasizes and explains the value of the benefits and services being provided. Knowledge is key to effective retirement planning. Participants cannot make good decisions with fee information alone.
So, what are the main points to remember surrounding plan participant fees?
Cheaper isn’t always better
Upon receiving the first wave of fee communications, some participants may be tempted to move their money into a cheaper investment option. This can be an unwise decision, as in most cases this hasty choice probably will not consider important factors such as the investment option’s asset class, personal retirement timelines or investment risk tolerance. Participant fee disclosure communications should therefore stress the many variables that go into investment option selection. Likewise, participants should be made aware that evaluation of fees is not only about making fee comparisons with other plans, as an apples-to-apples comparison isn’t always possible.
The investments, plan services and educational programs a participant receives may differ significantly from other plans available through other employers. Costs are also affected by other variables, such as the size or type of plan. Ultimately, the plan sponsor is responsible for evaluating service and investment options to be sure the fees their participants pay are reasonable – and will want to communicate the value behind these fees accordingly. In most cases, you get what you pay for.
Service sets plans apart
It’s important for participants to understand that fees cover expenses related to valuable services, such as: professional investment management, customer service, investment and retirement education, administration and recordkeeping. In addition, some service providers offer enhanced educational resources and dedicated representatives that work directly with participants as they map out their path to retirement.
And in some instances, providers may offer a smaller plan access to services and programs typically only offered to larger plans. All of these services come at a price and participants should be made aware that enhanced services typically come with higher fees.
Personalized communication is key
In addition to complying with the new disclosure requirements, plan providers and sponsors are increasingly trying to reach participants on their own terms. For some workers, statements aren’t enough, which is why providers offer personalized tools and resources to help participants become familiar with the total value of the plan.
This may come in the form of highly knowledgeable customer service representatives or onsite retirement consultants and benefits representatives who can meet with participants face-to-face and ensure that employees understand the fees and the valuable services and benefits those fees are paying for. The expertise of these individuals and the support they offer factor into the fees that participants will see.
Fee disclosure is a great opportunity to engage and educate participants on the value of their retirement benefit, yielding a greater appreciation for the benefits of participating in the plan and, ultimately, greater employee satisfaction. Supporting participants in their efforts to understand fee disclosure, the fees themselves, and the value of the plan will ultimately empower plan sponsors and participants to make informed decisions that will help them collectively achieve better retirement outcomes for participants.
Abbie Pancoast is chief counsel of Retirement Plan Services at Lincoln Financial Group. Bob Melia is vice president of product strategy, Product and Solutions Management at Lincoln Financial Group Lincoln Financial Group is the marketing name for Lincoln National Corporation, Fort Wayne, Ind., and its affiliates.