Workers to get 401(k) disclosures

FULL DISCLOSURE: Richard J. Anzelone, managing director for StrategicPoint Investment Advisors, with Betsey A. Purinton, managing director and chief information officer at the company. Anzelone says the effectiveness of the new disclosure reports remains to be seen. / PBN PHOTO/DAVID LEVESQUE
FULL DISCLOSURE: Richard J. Anzelone, managing director for StrategicPoint Investment Advisors, with Betsey A. Purinton, managing director and chief information officer at the company. Anzelone says the effectiveness of the new disclosure reports remains to be seen. / PBN PHOTO/DAVID LEVESQUE

New federal transparency rules will help employees participating in their company’s 401(k) plan become better educated and more aware of the plan’s intricacies.
In February, the U.S. Department of Labor’s Employee Benefits Security Administration issued the rules in the hope that participants and their employers will learn more about the fees and expenses associated with their retirement plan. In addition, plan administrators must also provide understandable investment-related information in order to better assess investment options.
By Aug. 30, employers offering a 401(k) received new notification forms from their service provider, detailing the plan’s costs, performance data on all investment options and the performance of benchmarks in order to provide a comparison. They must reveal the compensation they receive to administer the plan and whether or not they are serving as fiduciaries – investors – to the plan. In most cases, however, the employer acts as the fiduciary. The notification is designed to aid the employer to assess the reasonableness of the plan, including compensation paid to the service providers.
A second disclosure, a quarterly notice to employees, will explain how much each participant is paying in fees, including any charges related to 401(k) loans. The quarterly report is to be sent by Nov. 15.
According to Amy Guldhauge, the treasurer at Starkweather & Shepley Insurance Brokerage Inc. in East Providence, their firm has taken the changes in stride. “It hasn’t caused any problems for us. We use an outside company that is taking care of that compliance for us. We still have to take part in communications, getting that information out to people. Everything has been done in a timely manner and the report is very informative. We haven’t seen anything negative,” she said.
Richard J. Anzelone, managing director and chief compliance officer for StrategicPoint Investment Advisors of Providence, said the new reports are more helpful, but whether or not they will be effective is a different matter. “We won’t know if these regulations are effective until a few years from now. It could result in, say, bidding wars over fees,” he said. He also elaborated on the complexities of the new requirements.
“There are two sets of rules: one for plan fiduciary or sponsor, the employer, and one for participants. The transparency and the disclosure are there,” he said.
Retirement accounts usually have two fees; a management fee charged by the mutual fund company, and the administrative costs of running the plan. Now for the first time those fees must be disclosed, leading to speculation that service providers will be more motivated to keep fees to a minimum. “Employers will now be able to see the fees they’re being charged and determine if they are reasonable,” Anzelone said. With smaller fees employees are apt to receive more in their plan. For years, sponsors – employers – have been required to evaluate their plan and the expenses for services and investments. With the new reporting delineating costs and expenses, that task should now become more thorough.
“It will give the employee a better idea about the fees, costs and return on the funds that are in the account in order to determine if their plan is effective,” he said. “Some of the information is already there but it is a matter of making it presentable and understandable to the participant that doesn’t have a financial background. However, the big question is ‘Will people look at it?’ Many people aren’t aware that they are being charged fees to run the 401(k).”
Quarterly statements for employees must explain the returns for each investment and administrative costs to run the plan. Annual statements must include investment-related fees. As a deterrent, unreasonable costs could result in participants suing sponsors for a breach of their fiduciary duties. These fees can run to 1 percent annually, which can become a significant amount of money over time. Another piece of invaluable information is the fund’s expense ratio because higher fees do not equate to a higher return. Ratios should be compared to other plans in order to evaluate if an investment change would be beneficial.
“If a fund is producing outstanding results then it might not matter what it costs; you can make that argument. It would also allow for a participant to change their investment if they feel it is too expensive,” Anzelone said.
He knows that the conversion wasn’t easy. “People in the industry that actually were responsible for writing and sending the statements have told me it has been a lot of work,” he said. “It was quite onerous.”
Jason Dodd, a financial adviser at Oppenheimer & Co., Inc. in Providence, said the rules play a simple yet fundamental purpose. “The biggest misconception is that participants do not know that they have been paying fees,” he said. “Many times the company will pick up the cost but not always. Another thing that participants may not realize is that companies are required to shop for a plan every few years in order to do their due diligence.”
“For the plans we manage, we want to make sure we have the best plan for you,” he said. “For advisers that have plans that they have not serviced and they are collecting big fees, those are the people [the changes were] designed for.”
The push for transparency is the result of several reasons; the collapse of Enron, the financial meltdown and economic collapse of 2008 and the affiliated abuse of predatory lending, says Dodd. “When it came to mortgages, nobody knew how they were making their money at the time. Now, look at things like the credit card companies and financial institutions,” he said.” Anything that wasn’t being done for full disclosure purposes is now under review.” •

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1 COMMENT

  1. It seems like there’s nothing but not so great news going around nowadays, but then again a ton of it is down to the press just fear-mongering again because it gets ratings. Anyway, there is something to give some people hope, specifically if they have retirement anxiety. A number of reports revealed that 401(k) plans are beginning to make cash again, after years of stagnation.