Cut through the confusion surrounding fee disclosure
What is your goal for the new participant fee disclosure? “Do you want to be a sponsor who just complies with the regulations? Or do you want to step back and say, ‘OK, the purpose of the disclosure is to explain to employees what they are paying and what they are getting’?” says Troy Hammond, president and CEO of Santa Barbara, California-based Pensionmark Retirement Group. “The reality is, if you just throw all this data at people, it is going to be confusing. So we really are encouraging sponsors to get out in front of it.”
New U.S. Department of Labor (DOL) regulations for fee disclosure require that this information be in participants’ hands by August 30. Employers need to think beyond simply meeting the requirements and more about providing clarity—in part because the required disclosure includes a slew of fees that a plan participant might potentially pay; but some plan participants will not pay all of those (such as brokerage-window fees for self-directed accounts, loan fees and/or fees for investments they do not hold), says Devyn Duex, Pensionmark’s vice president of client relations. “Some people are going to take a calculator and add up all the fees,” she says. “And they may go to you and say, ‘You said I was paying 1.3%, but this says I am paying 2%.’”
The new regulations require plan sponsors “to provide a bevy of information to participants,” says Craig Hoffman, general counsel and director of regulatory affairs at the Arlington, Virginia-based American Society of Pension Professionals & Actuaries (ASPPA). But while the regulations require including a comparative chart on investment performance, he says, they do not require that sponsors provide fee-benchmarking data.
Think of the new disclosure as an educational opportunity, as opposed to just a regulatory filing, suggests Scott Parker, senior manager for Deloitte Consulting in Minneapolis. “The idea is, ‘Let us explain what those fee structures are and what it means for you and, as a plan sponsor, how we make sure the fees you pay are competitive,’” he says.
Focus on context, says Joshua Itzoe, partner and managing director at Greenspring Wealth Management’s Institutional Client Group in Towson, Maryland. “I have found that being upfront
and transparent with participants about fees, and trying to help them understand the fees and how they compare, actually builds a lot of trust. It is when the answers are not specific and participants have to come and put you on the spot—that is when you can create a feeling of something being hidden.”
“It is better to be proactive,” says Thomas Reese, a partner at Conrad Siegel Actuaries in Harrisburg, Pennsylvania. “If this is a surprise to employees and there is a backlash, you could really be backed into a corner.”
What Participants Need to Know
Ideally, sponsors started preparing for this new era of transparency six, 12 or even 24 months ago with a fee audit, Itzoe says. “It is better to know that you have a problem and give yourself time to fix it, rather than figure it out later,” he says.
And some sponsors may need to be prepped by advisers about plan fees before the initial disclosures, Duex says. “They need to understand what participants are paying, so they can field questions,” she says.
Most sources interviewed believe it makes sense to mail a concise written communication in addition to the required disclosure. A two-pager could work, with the first page explaining that participants will receive a fee disclosure as part of the new DOL requirements, says Tom Kmak, CEO of Lake Oswego, Oregon-based Fiduciary Benchmarks Inc. Briefly explain that the sponsor has a legal responsibility under the Employee Retirement Income Security Act (ERISA) to ensure fees’ reasonableness, and offer examples of exactly what the sponsor does to do that, such as benchmarking fees annually.
Too Much Information?
Overall, the amount of benchmarking information participants should receive will vary somewhat from employer to employer, sources say. “You have to know your participant base and how they best receive information,” Parker says. For a very engaged group, giving more details may work well. But for most participants, a simple communication should mainly explain the plan’s fees and what the sponsor does to ensure their reasonableness.
Parker advises against offering extensive fee-benchmarking data. “I think going into detail is too much, although the human resources department should be ready to [do so] to explain it,” he says. “This is already complicated, [so] if we start making it more complicated, it is not going to be helpful to participants.”
That said, most sources recommend providing participants with only basic fee-benchmarking information. “From a participant perspective, they just want to know: ‘What is the average person paying, and am I above or below that?’” Hammond says.
What should a sponsor do if the plan has above-average fees? “The first thing sponsors need to know is why. There are reasons certain plans have higher costs—maybe a plan has really poor demographics, maybe it has very low balances,” Itzoe says. “The second thing is to say, ‘What steps can we take to reduce and restructure the fees? Can we get into lower share classes? Can we utilize passive funds?’ Third, is there any way to pay some of the fees outside of the plan [with the employer taking care of some plan fees]?” The last thing, Itzoe says, is that if you cannot, or are not willing to, restructure the fees or pick up some costs, it is important to figure out a very clear, well-crafted explanation for participants.
For plans with an above-average plan fee, sponsors “need to demonstrate the value that participants are paying for,” Reese says. “If they have something that, compared to other plans, is above average or unique, explain that. They just need to be very specific, highlighting the positives and the unique things.”
Hoffman thinks plan sponsors’ fiduciary concerns, especially education versus advice, will prevent many from offering too much detailed, comparative fee information. “There is an issue with regard to where you draw the line and what information is educational and what information potentially constitutes investment advice,” he says.
Open for Discussion
Advisers such as Pensionmark have a solid idea of what information sponsors can expect participants will want, beyond an initial educational piece, because they have been proactive in approaching fee disclosure and have made disclosures ahead of the legal requirements. Usually, only a few participants call to discuss fees further, Duex says. “Probably only 1% or half of 1% of participants care, but for those who do care, it does not matter how many memos you put in front of them; to get their questions answered, they need to call someone,” she says.
Questions often relate to a couple of main areas. “A lot of times it is, ‘I read something…’” Hammond says, adding that a participant may have done online research about 401(k) fees. “People who read through that [information] are generally trying to find some kind of benchmark on their own,” he says. They may have come across an article mentioning a large plan’s very low expense number but may not understand that plan fees can differ, based on such factors as plan size, Duex says.
Participants also often need guidance through their own statements and an explanation of specific fees, such as brokerage-window. “They want you to walk them through the calculation,” Hammond says.