A summary approach to fee disclosures would be very helpful to plan sponsors, says Kevin Watt, senior vice president of Security Benefit’s defined contribution group. “The first round of 408(b)(2) needed some guidance,” he tells PLANSPONSOR. “We realized plan sponsors received disclosures from covered service providers from multiple places: third-party administrators, advisers, recordkeepers and other parties.”
In March, the Department of Labor (DOL) issued a call for comments about aproposal to include a guide or summary with the disclosures to plan sponsors. Phyllis Borzi, assistant secretary of labor for the DOL’s employee benefits security administration said the agency did not intend for providers to offer a master list of services and fees and have plan sponsors figure out which services they are using and paying for (see “A Conversation with the DOL”). The proposal calls for a summary that would streamline the disclosures to avoid length and complexity, or a guide to help plan sponsors know where to find specific fee data in the disclosures.
The disclosures plan sponsors received were fragmented, and the summary guide is a good idea, Watt says. “It would help plan sponsors understand who is working on their plans.”
But so far, Watt says, “the outcome of fee disclosure has been lopsided.” The 408(b)2 regulations show only half the story—the disclosures put the emphasis on costs and omit any discussion of value for that cost. If the proposal is adopted, plan sponsors will want to ask providers to specify the role they play and what services they give.
“Plan sponsors, particularly small ones, are somewhat confused about what services are offered and the actual services being provided,” Watt says. A recordkeeper should state in plain language the services included for a sponsor’s plan, such as maintaining participant accounts on the website, keeping track of participant records and vesting schedules.
Adding the services and value would be an opportunity for both plan sponsors and for providers, Watt says. It would be an opportunity for plan sponsors to gain a better understanding of what they get, and covered service providers would have an opportunity to explain why the fees are there, and what services they provide to support the retirement plan.
It is a misconception that people pay attention to fees alone without considering value, James Sampson, managing principal of Cornerstone Retirement Advisors, tells PLANSPONSOR. “Fees are only high in the absence of value,” he says. Taking value out of the equation is a mistake. After all, Sampson says, “you don’t go into a restaurant and ignore the left side of the menu. [You ask] 'What do I want to eat'—not, what does it cost?”
Leaving out this evaluation for the plan sponsor on a one-page summary for 408(b)(2) is useless; equally important as disclosing fees is disclosing their value, he contends. Sampson also points out that a small-company plan sponsor without a committee, or employers that manage the 401(k) in-house may be at a disadvantage. They may not be able to handle a summary sheet on top of the full disclosure to the same extent as a plan that has an engaged committee or a plan with an active adviser, he says.
Sampson feels components of 408(b)2 provider fee disclosures to plan sponsors are not nearly as broken as 404(a)(5) plan sponsor fee disclosures to participants. “If we’re just looking at the cost and benefits of a participant statement, we have an exorbitant cost for zero benefit because no one reads them,” he says.
“The participant notices absolutely need to be revamped,” he says. “What sticks out to me is that 404(a)(5) should be a one-page summary, because the employee really doesn’t have a whole lot of impact on their account.”
Streamlining 408(b)(2) is going after the wrong piece of the puzzle, Sampson states. The DOL should be focusing on the disclosures to participants. “You can’t give an employee a 10-page disclosure and expect them to understand it,” he says. “If we do all these things at the plan level and the participant never reads it, why are we doing it?” The end result is dysfunction, he says.
Watt agrees there needs to be more clarity for participants about the fees they pay. He feels giving fee disclosures to participants is a great idea, but it doesn’t provide an opportunity to show participants the value of what they receive. “There needs to be more balance around plan sponsors, who are trying to provide a benefit to their employees, showing the value,” he says. “The disclosures don’t explain investment return. If you focus just on cost without looking at return or value, it’s a one-sided view.”
There’s no way to know if outlining the value and services participants receive for their costs will ever be accomplished, Watt says, but he suggests it as a best practice for providers. “Make it easy to understand,” he says, “but also show the value.”
The proposed regulation really addresses just plan sponsors, Watt says. The participant notices need to be more summarized than they are. Looking at the progression of fee disclosures from 2012, he says, “I think we’ll continue to improve on that idea and really take it to a balanced approach, balancing the value for the cost you’re paying.”