Isn't it funny that within a week of the industry complaining to delay the implementation of 408(b)(2) because of the lack of the much promised FAQ guide on the part of the DOL, the DOL comes out with its much promised FAQ guide? Under the name "Field Assistance Bulletin 2012-02 408(b)(2) FAQ Guide," this 38-question-and-answer compendium no doubt became an instant bestseller within the hallowed halls of 401(k)-dom.
Unfortunately, as Fred Reish warned at an industry conference recently, with or without the DOL's FAQ, the new Fee Disclosure Rule – a.k.a. 408(b)(2) – contains its fair share of traps for 401(k) plan sponsors, their service providers and plan participants. I'm sure there are plenty more, but here are the three most apparent reasons for each of these constituencies to fear what happens once the new rule is implemented come July 1st:
1) 401(k) Plan Sponsors – There are plenty of hazards in this new rule for this group, including jumbled and inconsistent formatting requirements (meaning every vendor can disclosure in a different manner), the impending volume of such disclosure (more pages only makes it harder to find key data) and, as Reish points out, the inevitable "race to the bottom" tired 401(k) plan sponsors will resort to when they only look at fees and not service value. But the biggest trap is this: 401(k) plan sponsors will now be held liable for service providers who fail to comply with the rule unless they fire those service providers. Given the likelihood of muddled reporting buried deep into a non-searchable ream of paper, how will otherwise busy 401(k) plan sponsors even know if the service provider is non-compliant?
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2) 401(k) Service Providers – Again, there is no shortage of "gotcha" points for these folks either, from failing to properly identify services to failing to disclose all fees to failing to separate those fees by service. The most ominous threat, however, consumes the very nightmares of those service providers providing bundled services: Any plan sponsor or participant who felt they got a "free" service – and believe me, even regulators are shocked by the number of people that fall into this category – will wake up one day to discover, much to their chagrin, a sizeable percentage of their savings has been continually siphoned off by some of the nation's largest companies. Let's not even mention the executive perks and bonuses at those big firms.
3) 401(k) Plan Participants – This unlucky group is regularly vexed by the consequences of a poor education. Don't get me wrong: I'm not speaking of scholarly endeavor. In fact, academic studies have shown even PhD's flunk the basic aptitude test when it comes to managing their 401(k) assets. Yes, like the plan sponsors, this group will no doubt be made deaf and dumb by disclosure. Yes, savvy service providers (and lazy financial writers) will point the participants' noses at irrelevant fees like mutual fund expense ratios. But, here's the real reason employees should fear 408(b)(2): While the DOL expects participants to be informed if some fees are paid out of the fund (e.g., revenue sharing and 12b-1), nowhere does the DOL mandate the participants be made aware this represents a conflict of interest and the investment may not be in the best interest of the participant.
It's important to understand 408(b)(2) is not a panacea, but only the first step towards giving plan participants the level of fiduciary attention they merit. It'll be interesting to see how this all evolves over the next several months and, in fact, if a new 408(b)(2) Benchmarking industry blossoms as a result of the Fee Disclosure Rule. More portentous, though, is the looming cloud of liability and how class-action attorney might use 408(b)(2) as a tool to drive more revenue to their own coffers.
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
