401(K) Plan Participants Yawn over New Fee Disclosures
Long awaited 401(k) management fee disclosure mandates imposed last year by the U.S. Department of Labor to help workers understand the costs of retirement plan investment options appear to have had little impact so far.
Many plan participants either haven’t read the disclosure statements or consider the statements to be too complex and laden with jargon, according to industry observers. Annual and quarterly disclosure statements for 401(k) plans can indeed be lengthy, with some containing 30 or more pages of densely worded text and charts.
Impact of 2012 401(k) Fee Disclosure Requirements is Less than Expected
The new set of required fee disclosures, requiring plan sponsors to provide 401(k) plan participants with detailed fee information, took effect in the second half of 2012.
The final rule, from the U.S. Department of Labor’s Employee Benefits Security Administration (“EBSA”), required plan administrators to:
• Provide an initial annual disclosure of "plan-level" and "investment-level" information (including associated fees and expenses) to plan participants no later than Aug. 30, 2012.
• Furnish the first quarterly statement (for fees incurred July through September) no later than Nov. 14, 2012, 45 days after the end of the third quarter.
According to EBSA, the participant-level disclosure rule requires that investment fund returns and fee-disclosure information be furnished to plan participants in charts designed to compare each investment option available under the plan.
Armed with this more detailed 401(k) fee data, participants can then determine the reasonableness of the costs they are being charged to save for retirement and compare the costs across different investment options.
The EBSA oversees about 708,000 private pension plans, including 483,000 participant-directed individual account plans such as 401(k)-type plans.
An estimated 72 million participants are covered by these participant-directed plans, which contain nearly $3 trillion in assets.
Consumers Continue to Lack Awareness of 401(K) Fees
An AARP study in February 2011 revealed that 71 percent of Americans believed they did not pay any fees on their 401(k) accounts; an additional 6 percent did not know whether or not they paid fees.
Even though workers now receive detailed information about the costs of 401(k) plans as a result of the new disclosure requirements, fee awareness apparently continues at sub-optimal levels. Insurance industry research firm LIMRA reports that despite the new disclosure laws, half of 401(k) plan participants still do not know how much they pay in fees and expenses. LIMRA conducted a survey of more than 2,000 401(k) plan participants in January 2013 to measure the impact of the fee disclosure regulations.
High Costs of Sending Paper Fee Disclosures to America’s Seniors
A panel of industry experts at the 2013 NAPA/ASPPA 401(k) Summit in March 2013 discussed the challenge of providing fee disclosures to older plan participants, who prefer paper disclosures rather than electronic versions. In one instance, a company mailed 17 million paper disclosures and received very few phone or other inquiries from plan participants in response.
Additional Fee Disclosures for 401(K) Plans
In addition to the disclosure of fees to plan participants noted above, EBSA also required that retirement plan service providers disclose to plan sponsors the administrative and investment costs associated with their plans, as well as any potential conflicts of interest.
The legislative intent behind the ruling titled “Reasonable Contract or Arrangement Under Section 408(b)(2)—Fee Disclosure,” published in the Federal Register on February 3, 2012, is to help plan fiduciaries avoid overpaying plan service providers.
The rule took effect July 1, 2012, for new and existing contracts or arrangements between service providers and plans covered under the Employee Retirement Income Security Act (ERISA).
As fiduciaries build a data set of 401(k) costs over time, they will presumably have the opportunity to make more informed decisions about the service providers they select and the investments made available under the plan. Better employer decisions should lead to more efficient pricing and lower costs to retirement plan participants, thus preserving more of the savings that plan participants have available for retirement.
The aim of a federal mandate for new fee disclosures to participants in 401(k) plans was to provide easy-to-understand fee information to consumers. But so far, many plan participants aren’t reading, understanding or even aware of the fee disclosures.
Mark Johnson, Ph.D., J.D., is a highly experienced ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances.
Copyright ERISA Benefits Consulting, Inc.
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.