Retirement plans — including 401(k) and profit sharing plans — affect millions of savers nationwide.
A new regulatory change improves disclosure regarding how costly the plans are to the employers that sponsor them and the employees who participate in them. When March 31 participant statements are received, business owners should be prepared for the questions that are likely to result from the new information included in those statements.
While employer-based retirement plans offer one of the most popular savings vehicles for Americans, their convenience and effectiveness could come at a high cost. Lack of transparency and high vendor fees make it difficult for employees to see how much money is wasted on high fees. In a generally low investment return environment like we’ve been in for the past decade, employees blame poor fund management when, in fact, it might be high vendor fees that are at the root of the problem.
As with most things in the financial arena, transparency — open disclosure of fees and options — is the best solution.
We’ve actually had business managers tell us their financial advisors don’t charge anything to handle retirement plans. Really? That’s just not true! And the plan administrators — the folks at the business who have a million other things to do, but are listed as plan trustees — have a legal liability as a plan fiduciary to know better.
Now, finally, the Department of Labor passed a new set of rules that require retirement plan providers to give full disclosure on the full costs associated with participating in these plans.
By mid-year — and for many plan participants it will be effective with first quarter statements — participants will be able to see exactly how much participating in the plan costs. For example: If an employee has a $100,000 balance and the plan costs 3 percent annually, they’re going to see that $3,000 cost on their participant statement. The effect will likely be huge for high-cost, under-performing plans.
There’s no requirement that employers shift to lower cost vendors, but there will likely be pressure from employees once they see how much of their money is going to the financial salesperson as compared to what they get for it.
May-Investments qualified plan clients have received similar transparency since inception. We use low-cost funds bundled with a very cost effective plan recordkeeping vendor, so we’re not afraid to have this information on client statements.
For many employees around Mesa County, however, these statements are going to provide a glimpse into the world of high-cost retirement plans. For those employees with large plan balances, seeing the expense in terms of an annual dollar expenditure will likely lead them on a quick trip to the human resources department, and HR managers should be prepared.
The truth is that retirement plans are complex and expensive. The legal issues are complex and the penalties severe for both vendors and companies that make mistakes, so the liabilities of being in the business are significant. The recordkeeping requirements are similarly complex, and the ability to provide real time information and enable daily trading for plan participants creates a high technology hurdle for vendors. However, when companies see expenses approaching 3 percent, especially when they used to think they were getting something for nothing, both plan participants as well as employers (fiduciaries) might start to ask some hard questions almost as soon as those first quarter participant statements hit the desk.
If you’re a firm owner, are you ready for an onslaught of questions? At the very least, open your own statement as soon as it comes in the mail so you can determine if employees will have any surprises waiting for them. Transparency is nearly always a good thing, but don’t be caught off guard if the fee information that’s finally being shared will create a bevy of questions from employees.