401(k) Plan Fee Disclosures in 2011; Plan Sponsors, Are you Ready?

  • Written by David
  • January 10, 2011 at 2:34 pm
  • 0
  • Attention 401(k) Plan Sponsors

    New Fee Disclosure Rules For 2011

    Are You Ready?

    Sweeping federal legislation was enacted in 2010 affecting our industry. It was part of the Dodd–Frank Wall Street Reform and Consumer Protection Act.

    What this creates in 2011 for 401(k) retirement plans is significant, and much needed. Since we at David Gratke Wealth Advisors, LLC act as fiduciaries for retirement plans, we believe that these disclosures are way over due. The main thrust of the legislation requires full disclosure of ALL fees within 401(k) plans.

    The legislation roll-out looks something like this:

    July 2011: Aggregate Plan Fee Disclosure (Section 408(b)(2))

    • Who receives: 430,00 plan fiduciaries
    • What is disclosed: The total expense to the plan and all its participants
    • Minimum: disclosures required only if fees are in excess of $1,000 per year
    • Must potential conflicts of interest be disclosed in the fee disclosure? Yes

    November 2011: Participant Fee Disclosure (Section 404(a)(5))

    • Who receives: 72 million plan participants
    • What is disclosed: Each participant’s individual portion of total plan expenses
    • Must there be fee disclosure for each provider servicing the plan? Yes

    What is at stake here?

    A November 2010 study by DALBAR, Inc (click here for a copy of the 31 page report) was headlined: “ERISA 404(a)(5) A Game Changer?” Yes, it quite possibly is a game changer as plan sponsors and plan participants see, for the very first time, the cost of their 401(k) retirement plan.

    What are the possible ‘game changers’ discussed in the DALBAR report?

    Unintended Consequencesreveals the potential combined effect of the 2008 market collapse, tax policy and upcoming fee disclosure on participants and their possible decision making process. In the past ten years, investors have seen two major market corrections, uncertain income tax rates and the coming 2011 401(k) fee disclosures. Could this become a tipping point for investors to make irrational decisions as a result?

    Employer and Employee have different requirements – Disclosure for plan sponsors via 408(b)(2) is somewhat different than disclosure to plan participants via 404(a)(5).  Expect confusion!

    Effect on Investment ProductsWhat might be the effects by investors if there is no aggressive response by investment providers? If the fund industry does not respond effectively, expect more participant confusion.

    Spillover Effect – discusses how change in participant behavior may occur, such as causing investors to have heightened interest in fees embedded in other non-401(k) financial products.

    Disclosure Confusion – Expect spikes in inquiries from participants, flooding customer service departments and plan sponsor human resources/benefits departments with questions and concerns.

    “Section 404(a)(5) of ERISA for plan years beginning November, 2011, requires that every one of 72 million plan participants are told something that they never knew… how much they pay each quarter for their 401(k) plan. In fact, most participants believe they pay nothing for the services provided in their 401(k).”

    -Source: DALBAR November 2010 and DoL Fact Sheet

    Example of cost where cost adds no value

    Most employers understand that index funds by nature have low annual expense ratios since they do not actively trade holdings. One would expect to pay less than 50 basis points for such a typical S&P 500 index fund. Then why is it that our work routinely shows plan sponsors incurring expense ratios of 150 basis points for the same fund?

    Also waiting in the wings…..

    “The regulatory environment for financial advisors is in flux.  Most significant among these changes is what standard of care advisors will adhere to when serving the public.  Advisors (such as David Gratke Wealth Advisors, LLC) who are fiduciaries are legally and ethically obligated to do what is in their clients’ best interests.

    Brokers, on the other hand, have no current legal obligation to do what is best for their clients.  They are held to a lower standard, which says their advice only has to be “suitable” for a particular client’s situation.

    The Department of Labor is considering a proposal that would expose conflicts of interest in retirement plans by requiring brokers to declare whether they are acting as fiduciaries.  In most cases, brokers are not required to act in a fiduciary capacity, so this will be an eye opener for companies with 401(k) plans.

    An additional provision would require brokers to provide detailed overviews of their services and sources of compensation.  This disclosure may also come as a big surprise to plan sponsors.”

    -Source: FI Guide

    Ok, I am a Plan Sponsor-What Should I Do Now?

    • Review your current 401(k) plan for fee and performance disclosures
    • Review your Investment Policy Statement (IPS). Are you following it to measure why you selected your current provider? Is that current provider meeting the stated goals and objectives within your IPS?
    • Has your service provider reviewed your plan with you in the past twelve months?
    • Do you have an investment committee? Are there minutes documenting 401(k) plan reviews?
    • How much are you paying for your plan, in plain English?

    If you’d like to read more about the new fee environment, here are some good articles….

    Contact David Gratke Wealth Advisors to review your 401(k) Plan

    Let us review your plan with look at plan performance, plan costs, success of your employee education program and lastly, your fiduciary liability. From there, let us offer a strong recommendation where needed in order to redirect your plan’s resources in a more purposeful, productive fashion. Click here to contact us.


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  • Gratke Wealth, LLC is a registered investment adviser in the State of Oregon. The adviser may not transact business in states where it is not appropriately registered, excluded or exempted from registration. Individualized responses to persons that involve either the effecting of transaction in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption.