Help make sense of fee disclosure

Fee disclosure is the new reality for qualified retirement plans that fall under the Employee Retirement Income Security…

Fee disclosure is the new reality for qualified retirement plans that fall under the Employee Retirement Income Security Act of 1974.

The requirements are an opportunity for financial advisers to increase business, as employers will be looking for help in understanding the new formulas for fee information that they are required to explain to their employees.

Here are five suggestions to consider in light of the new requirements:

1. Manage sponsor expectations. One-third of plan sponsors aren’t familiar with the new rules, according to Deloitte LLP’s 2011 401(k) Benchmarking Survey. Many will be in for a shock when they realize that they now have to disclose and explain the rules to participants. Advisers can help by educating the sponsors so that they can provide the level of service required to run a successful plan. Many employers don’t understand how government oversight and regulation makes sponsoring a plan complicated. Participant education, investment selection and complex plan compliance issues require time, attention and, of course, money. Advisers can create opportunities by clearly explaining to sponsors the value that they bring to the process.

2. Address participant confusion head on. According to Callan Associates Inc.’s 2012 Defined Contribution Trends Survey, plan sponsors’ greatest concern about disclosure of fees for 404(a)(5) participants is potential confusion among employees created by the new Labor Department rules. Employers will look for help in explaining fees to overwhelmed participants, as well as in the creation of their participant disclosures. Advisers should offer to meet with participants to educate them about fees. In conversations with participants, it is important to stress that these are fees that “may” be charged and that a number of separate types of costs (investment, administrative and transaction) essentially are grouped together. The “bottom line” for participants, it should be emphasized, is that fees are a function of the services and investments chosen, which are based on an obligation to act “in the best interests of the participant.” That is the gold standard. The participant disclosures are designed to help them become informed not only about the costs of the plan, but also what they are getting for these costs.

3. Don’t let your clients have a “moving” experience. It goes without saying that the new disclosure requirements and Labor Department informational pieces will put pressure on plans to shop for value and to justify costs. All it takes is one participant to complain about fees to have employers leaning on advisers for answers. Some advisers fear that employers will panic and move their plan to a new service provider, just to demonstrate to employees that they have done their due diligence. It is important to explain to employers that they are under an ERISA obligation to make sure that fees paid out of plan assets are reasonable, but plans are under no obligation to select the cheapest service provider if this will lead to diminished service.

You also might want to point out that employers will need to explain to inquiring employees how any change in plan providers demonstrates value. By keeping clients well-informed, you don’t tempt them to move for the sake of moving.

4. Help the employer piece it together. Plans that have more than one service provider are likely getting fee information from more than one source. Many sponsors will need help coordinating and gathering all the right information. Familiarizing yourself with the new regulations can help you piece it together for clients and prospects. Your help in keeping them in compliance so they can run their business is a valuable service that will retain business and gain referrals.

5. Make sure that your windows aren’t broken. Many plans offer brokerage windows to plan participants, but the new disclosure rules create additional burdens on plans with this option. Industry benchmarking shows a very small percentage of participants actually use these windows. Advisers may want to consider recommending elimination of this potentially costly option if not enough participants use it. If your clients do use this feature, make sure that they are receiving all participant disclosure information that is required from all the firms participating in the window.

The new rules will create a slew of foreseeable and unforeseeable consequences. As plans are settling in and getting comfortable with the new fee disclosure requirements, it is incumbent on an adviser to embrace the concept and see the possibilities for using fee disclosure to build on existing relationships and create new ones.

Robert M. Kaplan is a vice president and national retirement consultant at ING U.S. Investment Management.