Several weeks ago I reported on the fi360 conference session in which Fred Reish shared his thoughts on 408(b)(2) – the DOL's new Fee Disclosure Rule that becomes effective next week. Reish and others expressed the concern that bundled service providers are sending or planning to send naïve plan sponsors an avalanche of paper.
This week I wrote a story from the perspective of independent service providers responsible for reporting those fees to give 401(k) plan sponsors a sense of what they might see from this type of vendor. The differences are stark and may indicate a new marketing battleground that every 401(k) plan sponsor should be aware of.
First, let's start with the reality that every 401(k) plan sponsor has the fiduciary duty to do what's best for plan participants. We can argue later if all plan sponsors actually embrace this theory in practice, but we can all agree that, in theory, this is their primary function as a plan fiduciary.
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With that, and again in theory, we need to assume all 401(k) plan sponsors will enthusiastically seek to fully understand the fees paid by the plan and the value obtained from those fees. (That's the real rule here, so all we're doing is restating what every good ERISA attorney, including Reish, has said.)
Reish and others worry, since the DOL has not provided a fee reporting template, some service providers have an incentive to obscure their fees. As the earlier article showed, these are primarily bundled service providers who have long hidden fees from the clients and whom, one would presume, is exactly the nefarious type of vendor the DOL is targeting in its new rule.
Since the original FiduciaryNews.com article appeared in May, other news outlets have published stories I indicating fee disclosures will come in the form of a dozen or more papers containing both relevant and irrelevant data. Furthermore, these disclosures will not provide a guide to help readers decipher the data. Technically, these reports are in compliance of the law, although they certainly violate the spirit of the law.
This should concern a 401(k) plan sponsor. If the plan sponsor has trouble decoding these reports, how can they expect plan participants to read them? Since the 401(k) plan sponsor is now on the hook should the service provider fail to disclose fees, a creative legal scholar no doubt will soon figure out a way to label these core dumps as "insufficient" therefore "non-disclosure."
After all, if a recipient cannot understand the communication, we say that the information was never communicated. Likewise, if a "disclosure" report fails to communicate the relevant fee information, then we can make the same argument that the fee data was never "disclosed."
If 401(k) plan sponsors take the initiative to find this legal scholar, they can aggressively push the disclosure issue back to the service provider and continually ask for clarification under threat of terminating the relationship. (This termination action, too, is now required of the plan sponsor by the DOL.)
But, as the newer article reveals, there is another option for dissatisfied 401(k) plan sponsors – they can consider alternatives to bundled service providers and look to independent service providers.
It might take a little effort initially, but in the end 401(k) plan sponsors might just discover the value-added benefits more than justify the work. In terms of tree-killing alone, the independent providers who partook of the interview indicated their fee disclosures were contained in 1-2 pages as opposed to 12-18 pages.
Not only do fewer trees fall in the forest, but since the report is more concise, the data is relevant and easy to understand.
And, again, by the book, a 401(k) plan sponsor's primary fiduciary duty is to tend solely to the interests of the plan participants. It is clearly in the best interests of the plan participants to clearly understand the fees they are paying the value they are obtaining for the payment of those fees.
After all, if a 401(k) fee is disclosed in a forest of papers, will anyone really notice those fees? Probably not. And that's not a good thing.
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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).
