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.

His firm talks to plan sponsors about the importance of benchmarking their fees and encourages them to discuss benchmarking performance at committee meetings. Whether your plan is benchmarking in the top or bottom quartile or decile, "all vendors are in negotiating mode these days," he says.

Brian Gregov, senior manager of AEPG's retirement planning division, stresses the importance of helping clients look at the numbers now. "You can't count on the vendor to interpret the fees and put it in perspective," he says. "Financial advisors should act as advocates with vendors."

Gregov says plan sponsors should understand their plans' record-keeping and administrative costs (bundled or unbundled) and every investment expense. They also need to understand their advisor costs to make sure they're leveraging the services being provided, he says.

Advisors can also help plan sponsors get in front of their participants to tell them what fees they can expect to see, including the costs associated with taking a loan or distribution. If the sponsor pays the advisory fees-which not many do-it should let participants know, says Kaye.

Don't be afraid to ask vendors for a reduction in fees or ask if they can throw in additional tools and services or greater communication efforts, Gregov and Kaye suggest. Also, find out whether vendors need to be compensated in basis points or on a flat fee per head, which they say controls costs better. Over the past year or two, they've noticed that record-keepers/third-party administrators have been increasing their use of the latter method with smaller plans, not just larger ones. Most plans should also ask for the lowest cost share class whenever possible, they say.

Kaye and Gregov expect to see further fee compression at both the vendor and advisor level.

Better Reception
Mike Lissner, a partner with Acropolis Investment Management LLC, a fee-only wealth management firm in St. Louis, is also excited by the new fee-disclosure rules. "This is a net benefit for the guy who works for an RIA," says Lissner, who thinks it will be easier to attract clients.

Acropolis manages about 25 401(k) plans with a combined $100 million in assets-12% to 15% of the firm's total assets under management. It has always been fully transparent on its private client and 401(k) sides and will only work with plan providers who are also fully transparent. But that approach often hasn't been easy to sell.

"Before we knew that transparency was coming, it was a difficult conversation," he says. "Plan trustees and sponsors didn't realize the fees were there, and we felt it would be difficult to compete when the person we were competing against said it was free."

Lissner also expects the new rules will ultimately save people money in retirement. He anticipates more fee compression and thinks the majority of plans will move to new providers over the next handful of years amid industry consolidation. He also expects to see better service as providers work harder to justify their fees. "Too many people are taking money out of the pie, and a lot of that fat will be stripped," he says.

Acropolis is generally able to reduce client fees by about a third, he says. It was even able to help a large health care company it started working with several years ago cut its fees by two-thirds-from approximately $663,000 to $232,000 on a plan with total assets of $36.4 million.

"The advisor fees were just wildly expensive," says Lissner. The plan's former provider, a broker who was a good friend of the key trustee, had the business for over 20 years and was taking advantage-a scenario Lissner says is all too common. The other trustees were reluctant to out-vote their colleague until they saw how much more expensive the broker was than several other firms.

To get a clearer picture, Acropolis helped the company break out its custodial fees (which had been baked into the fund fees) and its educational fees (hidden in the financial advisor charges). Acropolis helped the company cut its record-keeper fees by 33% by introducing it to an online provider with a low cost structure. That record-keeper is now doing some more work under the new fee disclosure rules and increasing its fees by about 10%, notes Lissner.

Beyond The Basics
Marcia Wagner, a specialist in ERISA/employee benefits law and founder of the Wagner Law Group in Boston, points out that there are many hidden fees in 401(k) plans including investment management fees, revenue-sharing arrangements, soft-dollar commissions and sub-transfer agency fees.

"A good financial advisor will tease this out of the new fee-disclosure forms," she says. "It won't be intuitively obvious to many plan sponsors."

Wagner notes that vendors must disclose fees and plan fiduciaries must check if they're reasonable. "A good advisor can bring these worlds together," she says. A couple of benchmarking providers include Fiduciary Benchmarks and Castle Rock Innovations.

"Having [knowledge of] fees is only half the battle-it's what you do with the fees," says Wagner. She has created fee policy statements that her financial advisor clients use with their clients. This written protocol includes such considerations as what plan sponsors will pay for and why, what parameters will determine whether a fee is not reasonable and what actions will be taken if this is the case.

How can advisors get a jump on the competition? Lissner suggests checking out sources such as FreeERISA and BrightScope to learn more about specific 401(k) plans. Advisors can differentiate themselves by offering education to their clients, he says-and he suggests keeping it simple to generate the best outcomes.

AEPG has an ERISA attorney speak to its clients' employees every couple of years as a value-added service. Kaye says this can be done live or via Skype or WebEx. AEPG also offers its 401(k) clients its "Advisor on Demand" option, which enables plan participants to sign up for a half hour consultation with a certified financial planner.

AEPG shares best 401(k) practices with other advisors and offers to partner with them to help them in this increasingly regulated space. It has also held educational sessions for CPAs and attorneys. As Kaye sees it, "Going the route of transparency and clarity is the best fiduciary practice."