Most savers are now aware of the toll the financial crisis has taken on the balance of their 401(k) plans – but the bite taken by fees is much less visible. A new regulation issued Thursday by the Department of Labor takes a step toward shedding more light on pension plan fees by requiring plan providers to disclose more information to the employers that sponsor these plans. Further regulation on disclosing fees to individuals is expected this fall.
Currently, employers who sponsor a retirement plan have a fiduciary duty to make sure that plan charges reasonable fees. But retirement plan providers have no obligation to disclose the costs of the various services they’re offering. Often, providers offer what are called “fee-free” plans – but that simply means the cost is borne by the workers instead of the employer. The only visible fee would be the expense ratio participants pay on the mutual fund or other investment vehicle they’ve chosen, and that revenue is then shared with other service providers. Costs are bundled together into a single fee that’s calculated as a small percentage of the assets invested in the plan, and paid out of those assets, not out of the employer’s pocket.
When this new regulation takes effect next July, employers trying to choose a plan will see a written disclosure of all the services that are being provided by the plan provider or its affiliates, and how much each service will cost – even for those “fee-free” plans. If a plan provider fails to disclose this information, they’ll be subject to financial penalties.
For some employers, the regulation won’t tell them anything they don’t already know. Some retirement plan providers have already started disclosing detailed information about fees, and many large companies have essentially demanded an unbundled fee system, says Robyn Credico, the defined contribution practice leader at Towers Watson, a consulting firm. Midsize companies are more likely to be paying a single vendor to administer their plan, and very small businesses frequently hire a broker who then sorts through options and chooses a plan for them, adding another layer of fees, Credico says.
Once more disclosure is available, companies will have to determine if the fees they’re paying are reasonable, by comparing their fees to a benchmark or getting quotes from other vendors, Credico says. Companies should figure out a baseline for how much they should be paying based on the size of their retirement plan and then re-evaluate those fees every three to five years as the market changes, she says.
The eventual disclosure of fees to employees is likely to cause more “consternation,” says Ryan Alfred, the president of BrightScope, a company that rates 401(k) plans. “Most participants in 401(k) plans don’t think they’re paying fees,” Alfred says. Only 26% of workers are aware they pay fees to participate in their retirement plan, according to a recent survey by the Transamerica Center for Retirement Studies.
The whole process of moving toward greater disclosure could still be upended, Alfred says. Rep. George Miller (D., Calif.) has been pushing for legislation on fee disclosure for years, and just recently managed to get legislation through the House, attached to a bill extending unemployment benefits for a third time. That bill is now stalled in the Senate because of concerns about the deficit. If a new law is passed, the regulations the Department of Labor has been developing will need to be reworked, Alfred says. “The regulatory approach is definitely faster,” he says.
