Navigating the 401(k) Jargon Jungle

by Robert on November 5, 2012

The Department of Labor recently issued new regulations regarding the disclosure of information about the fees that 401(k) plan providers charge to employers and individual plan participants.

The first new requirement kicked in on July 1, the deadline for providers to send information to employers regarding annual administration and management fees.  A second new rule was effective August 30—the date when employers were required to provide the same information regarding annual fees to their plan’s participants.

And a third new disclosure requirement takes effect this month—on November 14—when plan participants will start receiving quarterly statements of the specific fees charged to their individual accounts.

Good intentions

Sounds like a good idea, right? Well, yes … but the way these new disclosure requirements are being implemented is not without its critics. A recent article in The Wall Street Journal indicated that, rather than improving transparency for employers, providers are “drowning them in paperwork and fine print.”

“The DoL certainly had good intentions,” says Sam Henson, senior ERISA counsel for Lockton Retirement Services. “But there is little incentive for plan providers to make things clear. That puts the onus on the employer to sort through the ‘financialese,’ try to understand it, and—most importantly—determine if the fees they are being charged are reasonable.”

Henson also indicates this is a particular challenge for smaller businesses. “Larger companies typically have benefits and financial experts on staff, but at a smaller company it may be the human resources manager or the company owner who gets this information, and may not have the expertise to understand and analyze it.”

For employees—the actual plan participants who pay the fees—the stakes are high. Annual investment and maintenance fees for a typical 401(k) account can total $1,000 or more. That may not seem unreasonable on, say, a $100,000 account, but compounded over 20 or 30 years, it can have a significant effect on an individual’s retirement savings.

Solution rests on education

What’s the solution to all of this?  Henson has several suggestions, for all parties involved.

“First, I think there is more the DoL can do to be the watchdog in the process, helping to educate employers and employees, and in providing benchmarks to help everyone evaluate whether the fees they pay meet the ‘reasonable’ criteria,” he says.

“Second, employers—whether they like it or not—need to be proactive in this process. They need to be aggressive with their plan provider, and become informed consumers. A lot of companies set up a 401(k) plan, and then never revisit it. It’s like a home mortgage—you need to comparison shop every once in a while and make sure you are getting the best deal.”

Lastly, Henson says, “Employees need to step up as well, and pay attention to those quarterly and annual statements. It’s their future that’s at stake here.”

Sam Henson

The common theme: Education. At Lockton we’ve been running a campaign to educate employers on how these new regulations affect them—and how they can help their employees understand how fees can affect their savings. And we’ve worked with plan providers on efforts to reduce fees.

“None of this has changed the fact that a 401(k) plan is still an excellent savings vehicle and a benefit that employees value,” says Henson. “But now it’s time for everyone to become more proactive about using the information provided to manage these plans effectively.”

For more information on how Lockton can help your organization manage its 401(k) plan most effectively, please contact me at rruotolo@lockton.com or by phone at (646) 572-3962.

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