What You And Your Clients Need To Know About The New 401(k) Regulations

July 1 effective date for new rules

By Brian J. Quinn, CFA, CEBS

Brian J. Quinn, CFA, CEBS is a financial advisor with Centinel Financial Group, LLC in Needham Heights, MA.  He can be reached at 781.446.5027 or [email protected]

 

For the better part of three years, the Department of Labor has been drafting and revising regulations regarding expanding disclosure to both qualified retirement plan sponsors and participants. After many changes, the final regulations were enacted in February 2012. The plan sponsor disclosure regulations, known as 408(b)(2), are effective July 1, 2012; and the participant disclosure regulations, 404(a)(5), are effective August 30, 2012. So what does this mean to you and your clients?

Let’s start with the plan sponsor disclosure. This regulation is attempting to assist plan sponsors in meeting their fiduciary obligations. To do that, one must be able to assess the balance between service and costs from all vendors assisting them in providing a retirement plan for their employees. Historically, plan sponsors have been able to evaluate service relatively easily by phone wait times, transaction timeliness, employee education services, comparative investment returns and website functionality. Getting to the actual cost of all these services has been a much more difficult road and that is where the regulations come in.

Effective July 1, 2012, all service providers must start disclosing in writing all the compensation they receive whether directly or indirectly from a third party. They also must explain the arrangement between a service provider and their sub-contractors to aid in determining if there is any potential conflict of interest. The disclosure must indicate whether the costs are a transaction fee or taken as a percentage of plan assets. Bundled providers who earn revenue from assets under management that subsidize recordkeeping costs must clearly delineate those costs. Advisors must also disclose the compensation that they expect to receive from the plan. Investment expenses must also be clearly disclosed to plan sponsors. These various disclosures can be in writing or made available electronically, assuming the plan sponsor has the requisite access to the appropriate website. The disclosure must be made initially and then updated anytime a change is made for any of the arrangements.

Let’s start with the plan sponsor disclosure. This regulation is attempting to assist plan sponsors in meeting their fiduciary obligations. To do that, one must be able to assess the balance between service and costs from all vendors assisting them in providing a retirement plan for their employees.

The other disclosure required is on the participant side of the equation. Which is where regulation 404(a)(5) comes in. The theme is the same in that the Department of Labor wants participants to be able to make better educated decisions. The disclosure for participants breaks down into two main categories: plan/transaction fees and investment expenses. There are fees charged for recordkeeping that can be either paid by the plan sponsor or charged to participants. There are also certain transaction fees, like loan charges or distribution fees, which are specific to an individual’s transaction. Both of these must be disclosed in advance of a participant enrolling in the plan and then on their quarterly ongoing statements if any fees are incurred. The second area is on the investment side of the equation where historically service providers are required to show performance information as well as benchmarks.  Now, service providers will be required to provide more detail on costs. All statements once a year need to show, by each individual fund, the cost per a $1,000 investment in that particular fund as well as any rules restricting transfers and redemptions and associated costs.

So what does this all mean and how will it affect you in working with individuals and sponsors of retirement plans? From a plan sponsor perspective, you need to help ensure that you are providing reasonable value for the services that you provide to that sponsor. You also need to assist your plan sponsor clients in helping to ensure that they receive the required disclosures from their service providers and that they understand and document that they received them. From a participant perspective, my estimate is that about 90% of participants won’t skip a beat, but the anxious 10% certainly may start making some noise. The debate of active vs. passive funds will certainly become more of a discussion. The bottom line is to make sure that you assist your plan sponsor clients in the education process and are prepared for any questions that may come your way.