Low cost retirement plans aren't necessarily the best options for smaller plan sponsors, according to executives at Security Benefit Corporation. They caution business owners and 401(k) plan participants to avoid a 'fee race to the bottom' as the Department of Labor's new participant-level fee disclosure rules take effect today.
The company's retirement experts are concerned that the fee disclosure rules will lead to an outsized focus on cost at the expense of value.
The new rules, which apply to 401(k), 403(b) and profit-sharing plans covered by the Employee Retirement Income Security Act, will help plan sponsors understand the services received from providers and to determine the reasonableness of the costs incurred as well as providing more detail about administrative fees to participants.
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Simply pursuing the lowest cost is a real risk for small plan providers, which account for 90 percent of the nation's 401(k) plans, said Kevin Watt, senior vice president of Security Benefit's Defined Contribution group.
"There's no argument that the ability to easily see costs will prove invaluable to plan participants," says Watt, "but reasonableness means a lot more than cheap. Simply focusing on the lowest cost could result in a race to the bottom for the small-plan market, which has the potential to turn out badly for millions of plan participants."
The first round of the DOL's fee disclosure rules kicked off on July 1. Those rules required service providers to disclose compensation they receive, which may enable sponsors to make direct comparisons of the cost of services among various providers. But according to Watt, the smaller plans of everyday Americans — far and away the largest and fastest growing segment of the DC market as a percentage of all plans — need more than an 800 number and a website.
"A low-priced plan that generates poor results is no substitute for professional advice," says Watt. "Just ask workers who received help during the years around the financial crisis — They ended up with investment returns that were nearly three percentage points higher than those who did not."
The second round of the DOL's rules took effect today, Aug. 30. Employers are required to begin providing plan participants their initial fee disclosure statements showing what fees various investment options in their retirement plans entail. Watt believes this event will provide a significant opportunity for good advisers to interpret all this information for their plan sponsor clients with an eye toward outcome, not just cost.
"The real worth of an employer-sponsored plan is found in a successful retirement outcome for its participants," says Watt, "which is why a financial advisor who knows how to work with a 401(k) plan sponsor is so important. A well-run retirement plan is a tangible benefit for any small businesses looking to attract talent in today's competitive marketplace."
Security Benefit provides retirement savings and income vehicle's for America's pre- and post-retirees, focuses exclusively on employer-sponsored and individual retirement plan arrangements and partners with licensed and appointed financial planners around the nation.
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