The U.S. Department of Labor's new 401(k) fee disclosure rules haven't generated much of a response yet from plan sponsors or their participants, but the eventual reaction will be huge, industry experts believe.
So far, plan sponsors-who were required to receive fee disclosures from their 401(k) plan providers by July 1 and to provide initial annual disclosures to participants of calendar-year plans by August 30-haven't really been paying much attention to the details.
Just 60% of small business owners recall receiving the new fee disclosure documents. Those who did reviewed them for an average 16 minutes, and 68% said they're not fully prepared to answer employee questions about their plans, according to a recent ShareBuilder 401(k) survey. Luckily, they may not be asked to do much explaining about actual fees deducted in the third quarter from participant accounts, which must appear on statements to be provided by November 14 for calendar-year plans. "The majority of plan participants aren't going to notice or care," says Steven Kaye, founder and president of AEPG Wealth Strategies, a comprehensive wealth management firm in Warren, N.J.
In fact, 71% of plan participants think they don't pay any fees to invest in their 401(k) plans, according to an AARP survey released last year. But Kaye predicts that within a couple of years many plan participants, not just "mutual fund mavens," will be concerned about fees. Plan sponsors will need your help fielding their questions, understanding the reasonableness of their fees and negotiating fees as transparency triggers more competition among vendors.
The vendors currently aren't providing guidance and are disclosing information in different ways in the absence of standards. There's also very little coaching from the advisor front since approximately 70% of all 401(k) plans in the U.S. are managed by an advisor who handles just one to four plans and half are managed by an advisor who handles only one, Kaye says.
"It's like the blind leading the blind leading the blind," he says. "It's [also] the greatest opportunity in pension that I can remember."
Kaye and other professionals expect registered investment advisors to capture 401(k) business as broker-dealers and smaller advisors exit the space amid tougher regulations.
Fee disclosure was a big topic of conversation at the recent International Society of Certified Employee Benefit Specialists Symposium and the Employee Benefit Adviser Summit, says Kaye, a speaker at both events. "I think a lot of advisors are like deer in headlights," he says. "They knew it was coming, but they didn't know how to go back and do it."
Getting Started
RIAs, who are used to disclosing their own fees to clients, should have an easier time getting acclimated to the new fee disclosure rules.
AEPG, which gets about a third of its business from managing approximately 90 qualified pension plans with a combined $300 million in assets, has been bringing up the topic of fee disclosure with clients for about a year and a half. Larger clients, specifically those with a general counsel on staff, have tended to ask more questions, Kaye says.