DOL Proposed 401k Fee Roadmap: Merely Ineffective or A Major Plan Sponsor Sandtrap?
Earlier this month, the Department of Labor (DOL) issued new proposed guidelines for it 408(b)(2) 401k Fee Disclosure Rule. Along with this formal proposal, the DOL issued a fact sheet called “Proposed Regulation to Require a Guide to Assist Plan Fiduciaries in Reviewing 408(b)(2) Disclosures.”
As you may or may not recall, several years ago when 408(b)(2) was first proposed, the DOL promised to issue a guideline to help service providers format their fee disclosures. In an uncharacteristic (for a regulator) nod towards libertarian principles, the 408(b)(2) without the DOL issuing the promised guideline. As a result, 401k plan sponsors have been immersed in a Wild West of variegated disclosure forms, documents and compilations. One might even call the sudden influx of paper as “on the verge of anarchy,” but that would be redundant given the previous allusion to “libertarian principles.”
Nonetheless, the situation compelled the DOL to undertake a rigorous review of actual service provider disclosures and plan sponsor experiences with these disclosures. It should be noted the DOL refers to plan sponsors as plan “fiduciaries.” Upon further review, the DOL has decided “to require covered service providers who make their disclosures through multiple or lengthy documents to furnish a guide to such documents.” Furthermore, the DOL states “the guide must specifically identify the document, page, or, if applicable, other sufficiently specific locator, such as section, that enables the responsible plan fiduciary to quickly and easily find the specified information…” The DOL calls this new required document a “roadmap” for plan sponsors.
Reaction was immediate and swift among working class fiduciary advisers, many of whom now have nearly two years real-world experience trying to deal with the labyrinthian maze of fee disclosure wrought forth by Rule 408(b)(2). “No business owner by their own volition would ever purchase anything that would require, 22, or 28, or 35 pages to explain who gets paid, and how much,” says Tom Zgainer, CEO of America’s Best 401k in Scottsdale, Arizona.
Given the poor experience of the current DOL absence of guidelines, it was clear something needed to be done. “The industry definitely needs to simplify the disclosures to meet the best interests of the plan sponsors and participants,” says Ozeme J. Bonnette, Financial Coach at Tri-Quest Investment Advisors located in Fresno and Torrance, California. “I feel that the current requirements have further confused some. They are helpful and a step in the right direction, but things can definitely be improved.”
Will the proposed “roadmap” be enough to show plan sponsors where to easily find service provider fees? “I think it will be more effective provided it supplies an easy-to-understand plan-sponsor-point-of-view/ participant-point-of-view template,” says Timothy R. Yee, Co-founder of Green Retirement in Oakland, California. Yee continues, “The issue with the current fee disclosures is that there is no guiding template thus platforms may disclose the information any way they wish. This includes disclosing every possible fee under the sun regardless of their applicability.”
Still, skepticism reigns among other professionals. “The more paper just makes it more difficult for the small plans and the larger plans already understand what the fees are,” says Pete Marriott, Managing Director at Trinity Retirement Solutions, LLC in Charlotte, North Carolina.
“Adding more documents and decoders to documents that some are unable to read currently doesn’t appear to address the heart of the problem,” says Simon Moore, Chief Investment Officer at FutureAdvisor in San Francisco, California.
Deborah A. Castellani, Principal and Senior Fiduciary Strategist at Akros Fiduciary Management in Austin, Texas believes a majority of plan sponsors “will still not fully understand and properly use the information. I think it will be confusing for them. Your average Plan Sponsor has their regular business they have to run and don’t realize that their 401k plan is like running an investment firm inside their regular business. When they hire providers, they believe those providers take care of everything and most of the responsibility (including fiduciary liability) transfers them.”
Worse, as Drinker, Biddle attorney Bruce Ashton said in a recent PlanSponsor article, plan sponsors may be on the hook for vendors who fail to provide a “proper” roadmap. Will plan sponsors end up ignoring this new requirement? “They won’t ignore it,” says Castellani, “but they will rely on their providers and believe that their providers will take care of it, believing what they are provided is correct.”
Yee says, “They will likely know about it albeit it is hard to get through the overload of information we all get on a daily basis. Some may ignore it, not intentionally by any means. Of course, studies of behavioral economics (Prof. Dan Ariely et al) show that attaching a penalty to something can increase compliance, particularly if there is monitoring attached to it.
The power of the penalty may be working. John Graves, Managing Member at The Renaissance Group, LLC in Ventura, California, says “Plan sponsors know about this and are firing, now. Fear of litigation prompts the exodus.”
“Plan sponsors are very overwhelmed with all of the new regulations,” says Bonnette. “There will definitely be resistance and frustration. Employers don’t understand, and they depend on advisors to direct them in many compliance issues. So, given the relationship many plan sponsors have with their service providers and advisors, it may take a while for them to become aware. They may not ignore it, but they also may not react because they will feel lost in this mess.”
“Plan sponsors remain plenty in the dark regarding current guidelines,” says Zgainer, “so I think the service providers – anyone that makes a buck from the plan – should be helping them fulfill their responsibilities. Plan sponsors have a business to run, and should not be expected to fully understand ours.”
Yee, too, wonders why the plan sponsor is being held liable. He asks, “Why is there not more scrutiny on the non-compliant platforms? And given the initial fee disclosures, shouldn’t the non-compliant platforms from that period of time receive more scrutiny? Might a simplified fee disclosure increase the likelihood of compliance?”
The idea of a simple one-page summary has been brought up before. It would include a single line for service and a single line for the fee. “The data can and should be on one page,” says Zgainer.
Some service providers readily agree that a one-page disclosure makes sense. “I believe our fees should be able to be explained on one page, what I make what the funds are and how fees are related to assets if they are,” says Marriott.
But the problem goes beyond disclosure, no matter how efficient it is. Bonnette says, “The majority of participants that I meet with simply do not understand investments. This is not an economic/status issue, a gender issue, or based on any other type of labeling. People in general just need advisors to help them understand the mounds of paperwork that they receive in not-so-plain English. A simple fee disclosure could help participants better dissect the key points that will help them make better educated decisions.”
While he agrees with the idea, Graves doesn’t think it has a chance of becoming reality. He says, “Yes, a simple, one page description is always better, for all parties. This will never happen.”
The problem often cited with trying to reduce a 401k fee summary to a single page is that some fees are quite complicated. “One page may not be enough to lay out all of the variations available in the different platforms available,” says Bonnette. “For example, there are huge differences between fee arrangements in annuity-based products vs. brokerage accounts vs. collective trusts. There may not be enough room to disclosure revenue-sharing arrangements, surrender charges, etc. in a way that will be easy for the participants to digest.”
One possible solution is to include both a single-page summary with a back-up appendix. “If possible, yes a single-page summary seems like it would be a better alternative,” says Castellani. “It would need to be a summary with notes to show where the information was obtained – kind of like a table of contents or index. This way, the Plan Sponsor has a quick summary, but for those who want more information, it there would be all the supporting documentation attached.”
Again, even if we simplify the disclosure, unless the DOL mandates a disclosure requirement that easily allows plan sponsors to measure different spheres of fees on the same scale, it will remain easier to hide fees in certain platforms. “I can definitely vouch for the fact that plan sponsors do not understand the difference between different plan options,” says Bonnette. “Advisors who are not transparent can easily sway a decision maker toward a different platform simply because of a lack of understanding on fees. Since there are so many types of fees, it is often hard to track them down and do an apples-to-apples comparison. Providers who disclose fees in an all-inclusive manner make things so much easier on both the sponsors and the participants.”
In the end, the idea of a one-page summary remains more than alluring. It conforms to what many of us were taught when we first ventured out into the working world. “There is an old saying from my management days,” says Yee. “A one-page resume will be read. A two-pager might be read. And anything more than two will be tossed. Shortening it [401k Fee Disclosure] to one-page with a user-friendly template will increase the likelihood of the disclosure being read/ questions being asked/ fees being examined. A one-pager can really let the sun shine on the industry.”
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