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DC Plans Step Up Disclosure of Fees to Participants

January 28, 2011

While defined contribution plan sponsors say fee disclosure is a top priority in 2011, nearly 47 percent didn’t disclose revenue-sharing arrangements that offset administrative expenses to participants last year, a recent Callan Associates Inc. survey showed.

Beginning Nov. 1, 2011—though some begin Jan. 1, 2012—the Labor Department is requiring defined contribution plan sponsors to supply information on revenue sharing plus more detailed data on fees and expenses to participants.

“Once revenue sharing is disclosed, that could lead to some difficult conversations” between plan sponsors and participants since disclosure has never before been required, says Lori Lucas, defined contribution practice leader in the Chicago office of San Francisco-based Callan. “I’m worried [the disclosure rule] may have a negative effect when that’s not the intent at all.”

The Labor Department released the new rule in October 2010 as a way to improve transparency, saying 401(k) and other defined contribution plan sponsors must give participants detailed information on fees and expenses from their retirement accounts.

New rules require plan sponsors to supply two sets of information to participants, one that is provided when the employee is qualified to participate—and annually thereafter—and a second that is available quarterly.

Every year, plan sponsors will need to show total operating expenses for each investment option as a percentage and as a dollar amount per $1,000 invested. Each investment option must have one-, five- and 10-year historical performance data as well as comparable benchmark information so participants can better assess their choices. Websites for each investment must be included along with a glossary of terms.

Every quarter, participants will see how much was actually deducted from their accounts for administrative and personal activity like loans or sales charges.

If revenue sharing is used, where a portion of mutual fund expense ratios are “shared back” with the recordkeeper—typically a separate company such as a payroll provider or accounting firm—then plan sponsors need to disclose that information to participants.

Interestingly, 28 percent of plan sponsors in Callan’s survey said they are very likely to conduct a fee study, and 57 percent said they are somewhat or very likely to switch certain funds to lower fee share investments. Additionally, 15 percent said they are very likely to reduce or eliminate revenue sharing. The survey showed 85 percent of plan sponsors have calculated fees within the past 12 months, and 84 percent have benchmarked fees.

In making these evaluations, employers are taking the correct steps in making fee disclosure a top priority, Lucas says. “Plan sponsors are trying to get ahead of the curve before the new fee disclosure regulation goes into effect.”

Some experts are concerned that participants may shop for investments solely on cost factors, so plan sponsors need to be careful in how they disclose information.

“I worry we may be unintentionally sending the message that a low-fee investment may be read as an endorsement of the fund,” says Lew Minsky, executive director of the Washington-based Defined Contribution Institutional Investment Association, or DCIIA. “Fees are just one of the many items that need to be considered when building a portfolio.”

    Richard Doherty, benefits director for the $1.8 billion Southwest Airlines Pilots’ Retirement Savings Plan, says it isn’t the case with his 6,200 participants. His company has been disclosing fees since 2004, and as of October 2010, participants held an average of about $295,000 in their retirement accounts. Doherty says disclosing fees and expenses is a good thing because it helps participants understand exactly what they are paying for.

“This is a plan run by pilots for pilots,” he says. “We have a strong commitment to get the best plan with the best pricing possible.”

Many large funds, like Southwest’s, are ready or nearly ready for the new rule, but there is still a fair amount of work to be done, Minsky says.

Within the past few months, the DCIIA has held six round-table discussions with plan sponsors, providers and advisers, where participants say they wrestle with how to best present the information without risking liability. The DCIIA is working on models that can be used to help provide the information effectively.

“What we need to do as an industry is to give” plan sponsors tools, Minsky says.

Amy Reynolds, a partner with consulting firm Mercer’s Retirement Risk and Finance division, says preparing for fee disclosure gives plan sponsors an opportunity to evaluate all plan communications to decide how to get participants’ attention effectively. Mercer recently listed focusing on participant fee disclosure and its integration with other plan communications as defined contribution plan sponsors’ top New Year’s resolution.

Once a communications strategy is in place, plan sponsors must be vigilant in educating participants that fees are just “one piece of the puzzle,” when making investment decisions, Reynolds says.
 

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