Fred Reish Explains Fee Disclosure at 401(k) Summit

The regulations state that plan administrators aren’t held liable for the quality of the information in the disclosures if they “reasonably and in good faith” rely on that information provided by service providers. Here, again, Reish suggested advisors create a checklist to help make sure disclosures meet the requirements.

There are some special issues regarding participant disclosures that advisors need to keep in mind, Reish continued. If there are changes to the plan, participants must be notified between 30 and 90 days before the change takes effect. Furthermore, notification must be made to anyone eligible to participate in the plan, not just people who are actively participating. Reish suggested changes be kept to once a year when possible to avoid multiple mailings and the costs associated with them.

Other disclosures that have to be made to everyone, not just participants, include services and fees that must be listed in the enrollment package, Reish said.

Reish warned that one effect of these disclosures may be an increase in litigation. “Losses cause investors to go talk to attorneys who will look for failed disclosures,” he said. He warned that advisors may see more litigation in general. “The focus will shift to service providers,” he said, noting that 401(k)s are essentially run by service providers.

Sam Brandwein of Morgan Stanley spoke about behavioral changes among sponsors and participants following the disclosure regulations. One of the most common phrases he’s heard regarding the new disclosures, he said, is “much ado about nothing.”

He hesitated to say they would have no effect, though, citing behavioral changes following the enactment of seat belt laws in the past as a precedent. Before New York passed its seat belt law in 1984, just 16% of adults used them, he said. Now, that’s up to 91%.

He argued, too, that it wasn’t just the law and drivers’ fear of being ticketed that led to more people using seat belts, but the education and public awareness regarding the benefits that came with the law. In New Hampshire, where there are no seat belt laws for adults, he said, seat belt use was at 16% in 1984. Today, even without regulations for adults, it’s risen to 75%.

Brandwein noted that following fee disclosures, changes in participant “behavior will be slow to evolve because the starting point is so low.” He referred to a 2010 study by AARP that found 71% of people thought they paid no plan-related fees; another 6% said they weren’t sure if they did. “A lot of participants don’t understand how 401(k)s work. Even in the lowest-cost funds, there are still fees.”

One of the difficulties of effective disclosure is that participants are getting this information without context, Brandwein said. “Not every investment can be easily broken down,” he said.

Regardless of their fees, advisors can demonstrate their value with benchmarking. “Make the case for services you provide like training and education,” Brandwein said. He referred to a survey of plan sponsors by OppenheimerFunds in September that found nearly half of sponsors don’t believe providers with the lowest fees always offer the best value. However, just 4% of sponsors said they believed higher fees indicated a higher value.