This rule could be nicknamed "The Plan Participant's Bill of Rights" because it mandates extensive disclosures that must be given periodically to all 72 million participants in participant-directed plans, including fees and expenses that may be charged to an individual account.

On June 1, 2011, DOL published an extended effective date for the rule that gives calendar-year employers until April 30, 2012 to furnish initial disclosures to workers. You can find DOL's Fact Sheet on the rule here: http://www.dol.gov/ebsa/newsroom/fsparticipantfeerule.html

Clock #2 – In July of 2010, DOL published a Final Regulation Relating to Improved Fee Disclosure for Pension Plans, also known as 408(b)(2). This regulation requires plan service providers that expect to receive at least $1,000 in compensation from defined contribution or defined benefit plans to furnish disclosures in writing to the plan's fiduciary. They include any direct or indirect compensation to be received by the service provider or its affiliates. Direct compensation is paid directly by the plan sponsor, and indirect compensation is paid through other sources, such as a recordkeeper or investment adviser. In February of 2011, DOL extended the applicability date for the regulation to January 1, 2012. You can view DOL's Fact Sheet on the rule here: http://www.dol.gov/ebsa/newsroom/fsimprovedfeedisclosure.html

Why Plans Are Changing Vendors

Clock #1 (described above) will require detailed quarterly fee disclosures to be given by the plan to each individual participant in a participant-directed plan. Clock #2 will require service providers to make disclosures to plan fiduciaries "as soon as practical" but no later than 60 days after any changes are made in service terms. Together, these two new rules will greatly increase transparency and accountability in the U.S. retirement plan industry.

For each rule, here are a few reasons takeover plans in your market may want to change vendors in 2011.

Participant Disclosure Rule

• High-price plans – For the first time, millions of participants will be able to see the dollar amount of all plan-related fees and expenses actually charged to or deducted from individual accounts. They also will see a clear description of the services for which the charge or deduction was made. This will create more participant cost complaints for high-price plans that regularly charge participants more than about 1.5% of plan assets per year, on an all-in cost basis.  In an informative online guide, A Look At 401(k) Plan Fees, DOL sets the threshold for high-price plans at 1.5% annually and offers this example of the long-term cost drag on performance: "Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent." You can access the guide here: www.dol.gov/ebsa/publications/401k_employee.html
• Trails without Service – Mutual fund shares with 12b-1 "trails" typically add .25% to .75% to individual participant plan costs annually. In 2009, all mutual fund investors paid a combined $9.5 billion in trails. The SEC has proposed renaming 12b-1s "asset-based fees" and capping them cumulatively to equal the highest fee charged by the same fund for front-loaded shares. Trails have played an important role in the growth of participant-directed plans, by paying ongoing compensating to financial professionals who provide advice and service. Now that participants can clearly see and understand asset-based fees, they will ask how they are personally benefitting from the advisor's services. Trails in retirement plans, without compensating service, may soon be a thing of the past.
• Performance Comparisons, Benchmarks and Indexes – Starting in 2012, plans must provide to each participant a Model Comparative Chart that shows: 1) Performance of each plan investment option compared to a benchmark index over periods of 1 year, 5 years, 10 years and since inception. The Chart also must show total annual operating expenses and shareholder sales/service charges for each option, as a percentage of assets and per $1,000 invested. This chart will clearly demonstrate how much participants are losing in long-term performance, especially in under-performing actively managed funds. Of course, the comparative benchmark indexes are hypothetical and do not have expenses. But growing numbers of investors are aware that they can invest (outside their plans) in low-cost index funds. They probably will demand more ETFs and indexed fund choices in their 401(k)s. You can access DOL's Model Comparative Chart here: www.dol.gov/ebsa/participantfeerulemodelchart.doc
• Reasonable good faith reliance – The vast majority of takeover plans with less than 1,000 participants will rely on service providers to supply detailed quarterly cost/performance disclosures. DOL's rule provides plan administrators a safe harbor against liability for the completeness and accuracy of information, if administrators reasonably and in good faith rely on information from a service provider. Industry sources believe the "reasonable good faith" test requires plan fiduciaries to conduct in-depth due diligence on all providers. Under scrutiny, some may not measure up to the new standard.
• Internet and technology – The rule also requires plans to give participants prospectuses, financial reports and valuation statements for each option in which they invest. Any material the plan receives regarding proxy voting or tenders must be made available to participants. For well diversified investors who participate in many funds, these requirements will be too voluminous to fulfill with hard-copy delivery. Therefore, plans will need to rely on service providers with robust Web sites and electronic delivery technologies.

Service Provider Disclosure Rule – 408(b)(2)

• Conflicts-of-interest – The main thrust of 408(b)(2) is to require plan service providers to disclose: 1) if they are acting as fiduciaries to the plan; and 2) potential conflicts-of-interest that might compromise the quality of their services. In January 2011, the U.S. Government Accountability Office (GAO) released a detailed report documenting "revenue sharing" arrangements that channel payment to service providers for assisting in the selection of plan investments and menus. The study concluded that "many sponsors, particularly of smaller plans, do not understand whether or not providers to the plan are fiduciaries, nor are they aware that the provider's compensation may vary based on the investment options selected. Such conflicts could lead to higher costs for the plan, which are typically borne by participants." Although the new rule won't end revenue sharing, it will bring these arrangements into the open. Some takeover plans will try to eliminate the arrangements now, rather than waiting for a backlash later. You can access a summary of the GAO report here: www.gao.gov/highlights/d11119high.pdf

• Fiduciary liability – Plan fiduciaries who fail to obtain the required service provider fee disclosures, beginning in 2012, potentially can face liabilities under ERISA's prohibited transaction rule, even if the service providers fees are reasonable. When all service providers are required to state whether they are acting as ERISA fiduciaries, some established providers may choose not to act as fiduciaries. Takeover plans will seek out the extra protection of working with service provider fiduciaries.

Why Takeover Plans are Attractive

In each participant-directed takeover plan, you can start earning immediate revenue from the flow of asset-based fees (trails). In addition, there are five other revenue centers that you can cultivate over time:

1. Payroll growth – Most successful small companies don't stand still – they grow larger. Each employee added to payroll increases the plan's contributions and assets under management, especially in plans with automatic enrollment and employer matching contributions. Find the high-growth companies of the future in your market and let their growth make you wealthy over time!
2. Individual client growth – Most 401(k) plan participants aren't candidates for personal financial services now. But eventually, a few will save diligently, earn steady pay raises, sell homes or inherit assets. Each takeover plan gives you a window to identify them and an inside track to serve them.
3. Business client growth – Takeover plans can help you solidify your position as a "go-to" advisor for small businesses in your market. If you deliver outstanding service, owners of these companies will want to talk to you when they face major financial decisions. You can layer non-qualified executive benefits on top of 401(k) plans, too.
4. Rollovers and Transfers - In today's 401(k) and small plan market, almost every dollar that accumulates within a plan ultimately works its way into personal hands. In most cases, the transition occurs when the employee leaves the company because of: 1) retirement; 2) job change; 3) downsizing or layoff. Of course, people are retiring earlier, changing jobs more often, and being downsized with greater frequency. Job cycles are spinning faster, and that means people are taking personal control of their plan money at younger ages.  There is no better time than a plan distribution to capture new clients and help them develop long-term retirement planning. If you play your cards right in this market, many of the dollars that accumulate in retirement plans will come back to you again as rollovers or transfers to IRAs.

 Thanks to the new DOL rules, there has never been a better time to focus energy and attention on takeover plans seeking new vendor relationships. And who is a better advisor than you to help takeover plans upgrade their services and better control costs?