New retirement plan regulations are bringing transparency to industry fees. Will the outcome achieve the desired result of smarter investors?
New rules from the U.S. Labor Department, effective July 1, will dramatically alter the look of your quarterly 401(K) statements. Whether or not they alter your investment income is a different story.
A series of class-action lawsuits against large employers and retirement plan providers in recent years pushed regulators to call for more transparent disclosures of fees associated with retirement plans. Those fees include representative fees, administrative fees, distribution fees and expenses associated with 401(K) plan management.
“Up to this point, plan sponsors — such as the owner of a company or whoever is in charge of a plan — was supposed to do their due diligence to know what the plan was being charged, and those plan fees were supposed to be reasonable compared to what else is out there. In other words, they were supposed to have done their homework, but the fact of the matter is most of them didn’t have a clue,” Eric Hutchinson, president of Hutchinson Financial Services, said.
According to Hutchinson, the education curve will be tremendous for stakeholders throughout the retirement plan chain-of-command. “If you talk to the average plan sponsor today and ask them what they’re paying, you’re not going to get a clear answer, an accurate answer or very often, they’re going to say, ‘I don’t have a clue.’ If you go down to the participant level, they even have less of a clue. It all happens by magic, you know.”
The 401(K) fee disclosure rules are intended to help those participants who think “magic” is what drives investment transactions and returns. In theory, employers and employees will be empowered with the new knowledge and use it in a way to shop for better service and to compare costs.
“I think this whole affair that we’re talking about is going to serve as an catalyst to probably bring fees, in general, down in the industry because it’s all going to be out in the open and easier to compare,” Hutchinson said. “Comparison shopping was almost not a possibility for the average plan sponsor without hiring some real sophisticated help in the past.”
While shopping may mean more choices, the age-old game of value will still come into play. Cheaper won’t automatically mean better, said Chad Carlson, vice president, Delta Trust Investments.
“The cheaper the plan doesn’t necessarily mean the better the plan,” he said. “Plan sponsors don’t need to be confused or misguided to think that the least expensive plan is the best option. It’s most important that they understand the fees they’re paying are reasonable and that they understand what services they’re getting for the fees.”
Carlson also warns that the new information will be useless if investors and plan sponsors don’t understand how to make the disclosures work to their advantage. “This is much akin to the disclosures that went on the backs of potato chips a few years ago. There were a lot of folks who had the data in front of them, but didn’t understand how to use it and make better decisions,” he said. “There will be a significant education component to these changes.”
For some investors, the disclosure requirement could result in “retirement plan sticker shock,” but nearly every investment advisor thinks a net positive will come out of the regulatory burden.
“Transparency is a good thing — for plan sponsors and participants,” said Wade Partridge, president, Pear Tree Wealth Management. “We view it as a tremendous opportunity. If transparency has been your practice all along, then these changes really come as no surprise to clients.” He said he has worked with retirement plan provider partners and local third-party administrators for nearly a year to lay the groundwork for the pending changes.
“Our major focus now is to be available to our plan sponsor clients to assist them in fielding questions from the plan participants. For example, we are scheduling educational events for the plans we service in order to assist participants in understanding the new statement formats.”
Despite a likely positive outcome, there will be growing pains for the industry. Partridge thinks small-to-medium-sized plan providers could see their already-overburdened workloads stretched. Hutchinson sees litigation in the making, especially since the fee standard of “reasonable” is going to be subject to interpretation.
“The only way you can determine that fees are ‘reasonable’ is to benchmark them against something else, some appropriate standard,” Hutchinson contended. “I think there’s going to be a cottage industry of attorneys lining up to represent plan participants who think they’ve been wronged.”