When all is said and done, if participants are not saving enough to retire comfortably and plan sponsors are not receiving the quality of service they need, it matters little that the Department of Labor required volumes of disclosure designed to increase fee and investment transparency. Let’s take a closer look at the DOL rule’s impact on both of these groups.
Participants
On the first point — participants not saving enough to retire comfortably — DOL mandated that plans under their jurisdiction must make participants aware of what expenses are being deducted from their accounts. It also required that these participants have easy access to investment information. Both of these goals are admirable, but do they improve participant behavior?
Suppose a 50-year-old female participant has $35,000 in her retirement account. Now suppose she learns that $100 per year is being taken from her account to cover record keeping costs, and that the average mutual fund in which she can invest has an expense ratio of 50 basis points. She faces a number of important questions. At what age does she plan on retiring? How much money will she need at retirement? How much can she realistically afford to save? Given that amount, how much do her investments need to earn to achieve success?
How did the disclosure information she received help answer those questions?
Participant fee disclosure also created additional and significant plan administrative work. While many larger plans were equipped to handle these responsibilities, smaller plans looked to their service providers to help them meet the disclosure requirement. Further complicating matters: electronic distribution is not always an option.
If the DOL does foster a climate where information can be delivered 100% electronically (paper is the current default unless some significant work is performed to obtain participants’ consent), it seems reasonable to conclude that small plan fees will increase. Even with electronic delivery, fees may still increase since client hand-holding seems likely to continue. Disclosure monitoring is just not the plan sponsor’s core business. The 35-year-old participant in our example could ultimately have $150 or $200 more deducted from her account to cover disclosure costs. Clearly this was not the rule’s intent, but perhaps it is the unintended result.
Plan Sponsors
Retirement plan service providers, who received compensation directly from plan assets or indirectly from another entity, such as a mutual fund, were required to deliver a disclosure outlining the nature of the fees being assessed and their relationship, if any, to the entity providing the indirect compensation. (Service providers that only were paid directly by a plan sponsor and not the plan were exempt from these rules.) The idea was that fee transparency would help plan fiduciaries make prudent decisions concerning plan services, expenses and providers. On the surface it’s hard to find fault with this goal.
How is a plan sponsor to know whether or not the plan is receiving necessary services and is being charged a fair price? One way is to hire a company to benchmark the sponsor’s plan against other similarly situated programs. Another way is to put the plan out for a competitive bid and evaluate the responses.
Thirdly, a sponsor can purchase generic information that provides average costs and make a determination as to where its plan stands. And lastly, a sponsor can reach out to other plans directly, or through one of its advisors, and create its own competitive information. All roads lead to Rome — and each entails time and expense.
Also, it’s not all about price. For example, many providers simply offer plain vanilla services, while others review a client’s situation regularly to make sure the program continues to meet the sponsor’s objectives. Often this determination is qualitative and not just a cost-related line item. It comes down to confidence that someone is looking out for your interest. In many ways this is identical to the reason many people go out of their health network and pay more to maintain a medical relationship with a physician.
Disclosure is not “one and done.” Many businesses received disclosure information and dutifully filed it away. Unfortunately, if the DOL comes knocking, possessing the required disclosure is just one piece of the puzzle. The responsibility for documenting knowledge of the disclosure’s content and any actions that may or may not be needed is ongoing, and not just for the current year.
Additionally, if disclosure is incomplete, the recipient (that is, the plan’s fiduciary) must request more information; and if that information is not received within 90 days of the request, the fiduciary must report the “uncooperative” service provider to the DOL.
Needless to say, most sponsors are not equipped to fulfill DOL’s mandate other than to obtain the information, read it and ask questions if something is not understood. Some reasonable middle ground is needed, especially with regard to smaller plans. This is a time when employees need to save for retirement. No rule, even one with good intentions, should be allowed to create a “run to the exits.”
Jim Farley, CPC, QPA, is the Managing Member of James Farley, LLC, an independent firm specializing in business development, technical expertise, intellectual capital, targeted presentations and qualified plan and IRA consulting.
