The dam is about to burst. Soon there will be a flood of 401(k) plans looking to review, and perhaps change, their service provider. You, the financial advisor, should start helping your business owner clients in two areas. First, start by educating them on the upcoming disclosure changes. Second, be their hero by helping them find a better solution for their company 401(k) plan. This may very well protect them from an onslaught of employee outrage if their employees find that they have been paying high fees. If you provide 401(k) services, you may win this business. Even if you do not, you will still be a hero to an important client by helping them.
There are hundreds of thousands of 401(k) plans, representing trillions of dollars, which are going to be up for grabs in the next few years. Why will all of these plans become available? The answer is disclosure. Participants will soon become aware of the fees that have been taken out of their account for years. Many are going to be sorely surprised.
Secretary of Labor Hilda Solis recently said, "When businesses that sponsor retirement plans, and the workers who participate in those plans, get better information on associated fees and expenses, they'll be able to shop around and make informed decisions that will lead to cost savings and a larger nest egg at retirement." You can help your clients by leading the effort to shop their plan for them.
I know how challenging it can be to get an owner interested in talking about their 401(k) plan. However, frustrated employees will prompt the owner to focus on fees. In addition, the environment of low market returns over the past decade will fuel their frustration. The annualized return of the S&P 500 from 2001-2011 was a mere 1.44% and there are many plans that pay more than 1.44% in fees. When employees see that service providers have eaten up the lion's share of their already low return, there will be some very unhappy employees.
For calendar-year plans, the participant's third-quarter statement will list the participant's pro-rata share of all fees (over $1,000 in aggregate to the plan). In addition to disclosing the dollars, the service provider and the description of services provided (e.g., record keeping, compliance, audit, and advisory) will also be included. Insurance providers, payroll companies and PEOs that have historically said "all the costs are baked in" or "your plan is free" will be forced to disclose the actual fee for the various services provided.
This is clearly overdue when you realize that a good majority of participants think that their 401(k) plan is free and are going to be shocked to learn otherwise. A recent AARP survey found that 71 percent of 401(k) participants think they don't pay any 401(k) fees at all. What is even more surprising is that many small- and middle-market business owners also believe that their 401(k) plan is free.
Acropolis has been disclosing fees from day one. When we convert a plan there is frequently some push back from participants asking, "Why are we having to pay for our 401(k)?" Our education process helps participants come to understand they have always paid fees, that their fees are now transparent, and more importantly that their fees have been reduced. (In our case, we typically reduce fees by about one third to one half.)
One would wonder how so many plan sponsors and participants could believe that such a complex benefit would be free. In my experience, when I talk with owners and try to understand this, I consistently hear the same story. "John, who has done our insurance for years, also does our 401(k) and he said it was free."
This is a gross misperception. What John means by free is that it does not cost the company anything out-of-pocket. However, there are fees and the participants are paying them. They are most likely hidden within the expense ratio of the mutual funds. Higher-priced mutual funds allow the mutual fund company to remit part of the fees collected to the plan provider -- virtually concealing the fee. When employees learn about the fees they have been paying, the first thing they will do is question their employer. Unfortunately, sometimes the fees are abusive, and frequently not even the plan sponsor is aware of the total fees.
The lack of this vital information has been propagated because there has been a poor system of checks and balances. If the plan trustees and participants never see any fees, they have no reason to question the fees. When no one questions the fees that the broker is charging, the fees have the potential to get out of hand. Fee disclosure will bring transparency which will help bring the fees in line and create accountability for the services provided.