Why your employees may balk at their 401(k) fees

Most plan sponsors are unaware of the scope of fees that the plan participants pay for their 401(k) plan. This will be a game changer for many [lan providers as pln participants become aware of fees later this year. Remember higher fees result in lower returns and lower retirement accounts. Not all fees are created equal, in that some add no value to the plan.

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The individuals responsible for the plan will need to first understand the fees. Here are some of the main types of fees that 401(k) providers commonly charge:●Recordkeeping and administrative fees: This is what the provider charges to keep track of participant accounts and process their transactions. These fees also typically include services to keep the retirement plan in compliance.

●Investment adviser fees: Some plans have an independent adviser select and monitor the plan’s investment options.  These fees cover the adviser’s services.

●Expense ratio: This will usually be the largest component of plan fees. Most plans utilize mutual funds that will have expenses associated with them. Investment companies charge a fee to run the funds, and they generally take a certain percentage off the top. But built in to those fees can be other fees paid to third parties, arrangements loosely known as revenue sharing.

Many plan sponsors are unaware of the fees charged their employees. Many believe that their plan is free with no administrative costs to them. This will become clear when the new regulations become effective later this year.

Please comment or call to discuss how your plan compares to your peers.

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New rules highlight 401(k) education lapses

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Education is the foundation of all successful endeavours. When plan participants understand the what and the why they will save more and remain disciplined to a strategy. Plan participants do not have to know everything about investing, they just need to know the right things.

Maintaining effective plans with a strong education component isn’t just the right thing to do; it’s the foundation of a retirement plan that complies with federal rules. If plans are not delivering participant-driven education programs, they’re not equipping their participants to make informed decisions about their investments. Therefore, these plans are not compliant with federal rules and thus, they set up sponsorsfor potential lawsuits.This summer, when service providers supply plan sponsors with the required list of services they’re providing for their current compensation, companies should take note of whether education programs are included in their services. In many cases, they won’t be.

This shortcoming, along with various others showing how little many plans are receiving for the fees they’re paying, will prompt many sponsors to seek more reasonable fees. The best way to do this is to:

  • Issue a request for proposal (RFP).
  • Compare the scope of services to those offered by other providers for the fees being charged, with emphasis on individual employee assessment and education.

If effective, deeper financial education can empower employees to assess the required basic disclosures through the lens of fundamental financial knowledge. Only then can 401(k) plans ultimately achieve their true purpose: to assure retirement security.

Without proper education and coaching your company sponsored retirement plan adds little or no value to your employee benefit package.

Please comment or call to discuss how this affects your company benefit package.

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401(k) Fee Disclosures: It’s Time for Employers to Prepare

Employers who are proactive and address the fee disclosure regulations will experience less questions from employees and less stress. This regulation will separate the good from the bad. You and your employees deserve a good quality retirement plan that is fairly priced. It’s not about being the cheapest it’s about receiving a good value for a reasonable price. Eliminate all the pay points that do not add value to your plan.

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Now is the time for employers to prepare for the August 30 deadline. Responsible plan fiduciariesand plan administrators should take the following steps now.

  • Determine which plans and which service providers are covered by the requirements.
  • Develop a plan for assessing the completeness of service provider fee disclosures when they are received and setup a communication link with the service provider to correct incomplete disclosures.
  • Clarify with service providers who will formulate and distribute specific participant-level disclosures, including integrating certain service provider disclosures into the participant-level disclosures.
  • Establish a procedure for notifying the Department of Labor if complete information can not be obtained.
  • Establish ongoing processes to review and document the steps taking during the preparation of the fee disclosures to participants.

Employers who are proactive with regard to the new 401(k) fee disclosure regulations will experience a smooth transition. Those who ignore preparation will become reactive to employees questions.

Please comment or call to discuss how you company can prepare for the pending regulations.

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Why things just got a lot tougher for 401(k) plan sponsors

The big question is..Why have service provders been fighting fee disclosure so diligently? Do they have something to hide? from plan sponsors or participants or both? Should participants pay for all the cost in their 401(k)? The 401(k) is the sole source of retirement for most Americans and must be treated as an employee benefit. When these regulations become effective many plan participants will ask many questions. Are You, the plan sponsor, prepared?

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Here’s where things start to go south. What happens if a service provider fails to disclose its feesor only discloses a portion of them? Will plan sponsors get by merely through offering their best efforts to obtain this fee information? Probably not, if you read between the lines of the DOL comments. Borzi’s actual comment to the press indicated the 401(k) plan sponsor must fire any service provider that fails to properly disclosure its fees.So, in addition to knowing all the ins and outs of their specific plans, and the ERISA laws that govern them, plan sponsors have now been summarily deputized by the DOL to enforce compliance on service providers.

If you think about it, it’s a smart move by the DOL. It’s also in keeping with the whole self-policing philosophy that pervades this Internet generation. What better way to protect the masses if the masses have the authority to unilaterally punish wrongdoers (albeit, it’s only by firing them). If the DOL is really inventive, it can create a disclosure site where plan sponsors can report their compliance related lack-of-disclosure firings.

This would help other plan sponsors become aware of potential non-compliance liabilities resulting from hiring these vendors. In turn, a public disclosure file, similar to the on-line “complaints” log the SEC provides to investors, might just provide an incentive for service vendors to comply.

In the end, this just might make things a lot easier for 401(k) plan sponsors.

The new fee disclosure regulations will make both the plan sponsors and plan participants on the fees they pay and why. The plan participants will benefit because lower expenses results in higher return. Remember an extra 1% in fees over 40 years of saving makes a huge difference.

Please comment or call to discuss how your plan will be affected by the new fee disclosure regulations.

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408b2 Poses Concerns For B-Ds and Small-Plan Advisers

There will be many service providers looking for ways around the new fee disclosures rules in order to take advantage of plan sponsors and participants. This is unfortunate since the reason for the regualtions is to improve the quality of retirement plans offered to employers. If the retirement plan is to survive in the private sector the interest of plan participant must come first above all else.

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Roberta Ufford, principal at Groom Law Firm, said she agrees brokers must be cautious if they elect to state a range of fees. Ranges rather than specifics make sense for brokerage windows because so many compensation arrangements are possible, but broker/dealers must ensure their range numbers are realistic and standard for the industry.”When you use a range, it should be appropriate for the circumstance, she said. “[The] DoL intended to provide flexibility [by allowing ranges]  when more specific disclosure would be difficult to provide, and that can be a great thing, but if you’re trying to get a specific answer for when it’s OK to use a range instead of more specific information, there is no specific answer. So you really have to use a good-faith effort here.”

Ufford thinks the real problem could arise with small-plan advisers who may not have been disclosing detailed information about compensation. Many recordkeepers and other plan services providers already have systems in place to disclose specific indirect compensation because of Schedule C on Form 5500, which has required plan sponsors and administrators to report service provider fees and compensation for plan years beginning in 2009 (see “EBSA Issues Schedule C Fee Disclosure Guidance“).

There will continue to be confusion on fee disclosure, particularly when there is a brokerage window within the plan. Plan sponsors will never really know there fee disclosure information is complete or realistic when working with a broker dealer.

Please comment or call to discuss how this affect you and your plan.

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DOL tells employers when they must fire advisors to 401(k) plans

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The new fee disclosure regulations will force plan sponsors to deal with the quality of retirement plan they offer their employees. These new disclosures will help plan participants improve results by reducing expenses. Just a small decrease in expenses will mean a more successful retirement outcome for plan participants.

The final rule regarding this provision is more strict than the earlier versions, says attorney Fred Reish, an attorney with Drinker Biddle & Reath LLP. He points out that the wording in previous versions of the rule was more relaxed stating that employers could fire their advisors.Now, it’s a requirement and the employers must also notify the labor department.

“Before, the statement said that you should consider firing the provider but now they changed it and it’s very clear that it’s mandated that you must fire the provider,” he says.

While the language of the DOL refers to “covered service providers,” Reish says there’s no doubt that “covered service providers” include RIAs as well as providers and other types of advisors.

How big a deal?

While this provision may cause some advisors to worry, top advisors have already been doing this for eons, Alfred says. “The best independent advisors operating in the retirement space have been fully disclosing all of their fees for years. So, this rule is unlikely to even get their attention.”

Rick Meigs: I believe it [this new provision] is not well known to advisors.
Rick Meigs: I believe it [this
new provision] is not well known
to advisors.

But given that many small companies are overwhelmed by day-to-day concerns, giving their 401(k) plan fees more scrutiny will likely be placed on the back-burner, says Phil Chiricotti, president of 401(k) organization the Center for Due Diligence.

He predicts that employers don’t want to be charged with these types of tasks.

“Small-plan sponsors are going to outsource the disclosure work, or work with someone who can do it for them or terminate their plans,” he says. “They are not going to spend every moment on their retirement plans when they can hardly keep their box company, window company or whatever they make open. The burden on small plan sponsors is almost insurmountable.” See: Phil Chiricotti speaks out on broker-sold commissions, RIA fees and heresy.

Small business owners should begin to look for outsourcing opportunities with the fiduciary responsibilities mounting. The new fee disclosure regulations are just the beginning. This will only force plan sponsors to offer a better retirement solution to their employees.

Please comment or call to discuss how this affect your company.

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Why 401(k) Fee Disclosure is a Big Win for Small Business Owners

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Improving the quality of retirement plans to their employees can reduce anxiety and improve results. This employee benefit is becoming more and more important as the number of defined benefit plans decrease. Just today GM announced it would freeze pension benefits for their salaried staff.

Look to pay 1% or less for all-in participant feesSmall and mid-size businesses have historically been subjected to the most confusing and, unbeknownst to most, the highest-cost plans.  Many providers have designed their plans so that employers pay a small administration fee while their employees pay large participant fees that go well beyond general fund expenses and typical asset management and recordkeeping services.   They often include extra loads, wrap fees, 12b-1 fees, and often consist of high expense actively-managed mutual funds or even annuities versus lower expense equivalent fund options.  This can mean employees are paying two or even three percent in all-in fees – an amount that’s two to three times more than an appropriately priced plan.

All-in participant fees including fund expenses should come in at one percent or less.  Just paying one percent more in fees can cost employees tens if not hundreds of thousands of dollars in retirement savings over their career.

Plan sponsors will realize added responsibility when the new fee disclosure rules become effective later this year. Many employees will begin asking why they are paying such high fees. This will result in greater scrutiny and should help plan sponsors provide a true employee benefit.

Please comment or call to discuss how this affects you and your company.

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How Small Business Owners Can Fine Tune Their Company 401(k) Plans

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The 401(k) plan has become the sole source of retirement for most Americans. The quality of plan you provide your employees directly affects their ability to retirein the future. Many 401(k) plans have been used as a speculation vehicle and not a retirement tool. This must change to providing a more pension fund like 401(k) plan. Your company will become more competitive for top talented employees by offering a top quality plan.

Prune an Excessive Fund Line-UpWhen it comes to having investment options for participant directed 401(k) plans, many advisors and plan sponsors believe that more is more. Studies suggest that less is actually more because plan participation for salary deferrals is depressed with participant directed plans with large fund menus because it overwhelms participants. I have seen plans with 28 and even 50 different mutual fund options on a single plan menu, which has to confuse plan participants. There should be no reason why a plan has 3 large cap growth funds. Too many fund choices have also been shown to spur participants to invest more in less riskier investments which may negatively affect their asset allocation and their retirement savings. Why have 28 mutual funds in the fund lineup when 12 can do the trick?

Review Plan Fees
It is a breach of a plan fiduciarys duty of prudence to pay fees that are unreasonable for plan administration and investments. It is required for plan sponsors to understand the fees that plan participants pay and determine whether those fees are reasonable for the services involved and what is available in the marketplace. With fee disclosure regulations coming into effect in July 2011, all plan sponsors will be advised by their plan providers as to what fees are being charged and what compensation that these providers will receive. Therefore, plan sponsors have no excuse not to review plan fees and inquire with competing plan providers to determine whether the fees are reasonable. This past year, a Federal District Court in California determined that a plan sponsor breached their duty of prudence by using retail share classes of mutual funds, when less expensive institutional share classes of the very same funds were available. Plan costs have been an important discussion over the last few years because of the demands for required disclosure and because so many plan sponsors have been sued by participants for excessive fees.

Complete an Annual Review of the Plan

Retirement plans are like automobiles (another car reference), they need constant maintenance to run to its optimum capability. Too many plan sponsors have a “drawer” mentality when they take their plan, put it in the back of the drawer and forget about it. A 401(k) plan should be reviewed annually to determine whether the fees being charges are reasonable, whether the investments are still proper according to the IPS, whether the plan still fits the needs of the sponsor and participants, as well as determining whether the plan documents and the plan’s administration is compliant with ERISA and the Internal Revenue Code. While plan sponsors may consider this review cost prohibitive, there are many financial advisors,TPAs, retirement plan consultants, and ERISA attorneys (including this one) who can perform that service at a reasonable fee.

It is required for a plan sponsor to keep their 401(k) plan in tip-top shape. They should consistently review and update their plan as needed. 401(k) plans are an employee benefitand one of the ways to improve that benefit is to rev up the plan with some of the new amenities and features available today at low or no cost. A plan sponsor with a 1985 Oldsmobile Delta 88 of a 401(k) plan in 2011 will find out thehard way why their plan should have been like a 2011 Ford Mustang by paying large lawsuit settlements to plan participants.

This is just a few important items that need the attention of the plan sponsor. Many small plan sponsors have neither the time nor staff to sufficiently deal this this. These sponsors should out source these functions to independent fiduciaries.

Please comment or call to discuss how this could affect your ability to attarct and retain top talent.

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Plan Sponsors Need to Be More Aware of Administrative Fees

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When the new fee disclosure rules become effective in 2012 plan participants will learn what they are paying for in their retirement plan. An independent analysis of your plan will help determine how and if the plan should pay for administrative fees.

“Direct contribution plans have a lot of moving pieces that can be relatively complex,” Lucas said. “They need to get their arms around these fees. They need to know how they are paying these fees. The plan sponsoralso needs to be able to explain why some are paying fees and some are not.”Other results from the survey show 37.5% of sponsors that credit revenue sharing back to plan participants do not know how this happens. Also, more than 16% of plan sponsors are uncertain if their plan offers an ERISA (expense reimbursement) account.

The survey also found the leading compliance concern among plan sponsors was the lack of clarity on how to comply with the U.S. Department of Labor’s 408(b)2 fee disclosure regulations; however, coming in a strong second was no concerns at all about compliance. Lucas said she is under the impression that plan sponsors who lack concern in this matter are looking to their recordkeepers to ensure compliance

Plan sponsors should be more concerned with the quality of retirement plan they provide for employees. Many rely on their service provider with mixed results often poor.

Please comment or call to discuss how the new regualtions might affect your plan.

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DOL says no extension on fee disclosure deadline

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There are many in the retirement plan industry desparately trying to delay fee disclosure, indefinitely if possible. This will not happen because the DOL understands how critical this information is to all Americans looking to retire someday. Ideally retire without the aid of the government.

The Labor Department has refuted claims that it plans to move the April 1 compliance deadline for new 401(k) fee disclosure rules to later in the year to give service providers time to make changes based on the final regulation.The 408(b)(2) regulation will require service providers to detail any fees they are charging plan sponsors. The final regulation could be issued before the end of January.

“The department is sympathetic to concerns by industry, but we haven’t signaled that applicability deadlines will be extended,” said a DOL spokesman. “We’re sympathetic to concerns, so we are aware of them. I’m not going to speculate where the current information is coming from.”

Reuters released a story on Wednesday stating that the department was thinking about moving the compliance deadline.

Whether the deadline is extended or not fee disclosure will happen. Plan sponsors should be aware of all the cost paid by their plan regardless. This benefit is far too important the future of all American workers.

Please comment or call to discuss how this affects you and your organization.

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