Are you ready for 401(k) fee disclosure rules?

Michelle Hicks

As recently as last summer, when I asked clients how they were preparing to respond to new 401(k) fee disclosure rules I got this answer, “I’m not worried about it. My vendor is handling it.” Now, with the rules taking effect in just a couple of months, I’m hearing this answer, “OMG, I didn’t know I had to do so much to comply.”

The rules are causing a New Year’s panic for many Plan sponsors. They were issued by the U.S. Department of Labor under ERISA regulations, take effect April 1 with the first annual notice required no later than May 31, 2012, and require a lot more of plan sponsors than ever before in regard to their fiduciary responsibilities.

Plan sponsors now MUST tell all participants about fees affecting their 401(k) account. This will happen through an annual notice that includes a narrative description and comparison tables in addition to new types and formats for information on quarterly statements, confirmation statements, websites and fund fact sheets.

Once the first annual notice gets out the door on or before May 31, it will be required to be sent every 12 months to existing participants and to newly eligible participants on or before the date they are able to direct investments.

In order to provide the information listed above, Plan sponsors should work with their record-keepers to implement additional audit processes to ensure the validity of the data they will be providing. For example, the Society for Human Resources recommends what it calls a “Fiduciary Supply Chain Management” process.

In this process, Plan sponsors should verify they have received the appropriate disclosure information from their vendors, examine the disclosure to ensure that they are adequate under the new rule, and determine by an “audit” process that the fees provided are reasonable and fair.

In order to ensure your organization has the skills required to fulfill these new roles, SHRM encourages employers to get some training or even bring in some outside experts. They recommend those with the responsibility of auditing fees go through a certified audit training course or bring in a licensed fiduciary supply chain manager, or both.

Plan sponsors – which are actually employers – also need to be prepared to answer questions of employees once the fees are disclosed. A survey of employees found many do not realize they are charged fees to participate in an employer’s 401(k) plan. Even if the information has been previously disclosed, it did not resonate, and it could open up a Pandora’s Box of questions.

Employers should be prepared to field these questions that go beyond compliance if they want their employees to value their retirement savings plan. In addition, if employees are not educated about what the fee disclosures really mean, participants could misinterpret the fee disclosure to mean they should only look to invest in “low-fee” funds – which may be an important consideration but is not the only consideration of a fund’s performance. In other words, this is a good time to promote financial education concepts and direct employees to resources.

What drove the DOL to issue these rules is an interest in the well-being of participants. Now that most employers have shifted from paternalistic retirement benefit plans like pensions, employees must take on more responsibility in managing their retirement savings. The DOL has clarified its expectation, that Plan sponsors have a fiduciary duty to ensure participants have sufficient data to make informed investment decisions.

But, really, participants need more than data. They need context. And, as an employer who invests a lot in providing a 401(k) benefit for your employees, if you want them to appreciate and value that benefit, investing in communication and education around that data is another imperative you should consider when complying with these new DOL rules.

Michelle Hicks is a communications consultant with Buck Consultants.

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