Sometime this year your 401(k) quarterly statement will arrive, as usual, in your mailbox. What won't be usual, however, is what's inside the envelope or email. That's because the quarterly statement will feature not just the usual mumbo jumbo that you're accustomed to reviewing (or not), but a whole lot more.
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Under a new Labor Department regulation that goes into effect this year, sponsors of retirement plans will be required to disclose detailed information about plan features, investment options, and fees and expenses to participants, beneficiaries, and even workers who are eligible to participate in a plan but don't.
According to a statement issued today by the Labor Dept. plan administrators for what are called calendar-year plans now must make the initial annual disclosure of "plan-level" and "investment-level" information -- including associated fees and expenses -- to participants no later than Aug. 30, 2012, and the first quarterly statement (for fees incurred July through September) must be furnished no later than Nov. 14, 2012. The Labor Department also released today a companion set of rules outlining how companies that administer 401(k) and similar plans must disclose administrative and investment costs to employers who sponsor the plans.
The Labor Department will not, however, require that sponsors of retirement plan, your employer, provide a decoder ring with all that new information. So, allow us to fill in the void.
First, this: The new regulation applies to what are called officially called ERISA-covered participant-directed plans, according to Larry Goldbrum, the general counsel of the SPARK Institute, a nonprofit group representing retirement plan recordkeepers and administrators.
In essence, that means all sponsors of 401(k) plans and many 403(b) plans will have to comply with the new regulation.
The regulation does not, however, apply to sponsors of Simplified Employee Pension Plans (SEPS) and SIMPLE (Savings Incentive Match Plan for Employees of Small Employers) IRA plans.
Nor does it apply to IRAs. (ERISA, by the way, is the acronym for the Employee Retirement Income Security Act of 1974, a federal law that establishes minimum standards for pension plans in private industry.)
Now truth be told, your employer won't be doing the disclosing per se. It's likely that your employer will ask the plan's recordkeeper to distribute the necessary information to employees.
But no matter who's doing the disclosing, here's what you can expect, according to Goldbrum and other interviewed for this column. There are three basic types of disclosures required: investment-related, plan-related and then fees and expense disclosure.
Investment-related disclosures
Sponsors will be required to present information about the investment options in the retirement plan in a chart that allows plan participants to compare fees and expenses, Goldbrum said.
And the disclosures must be made for mutual funds, bank collective investment funds, insurance annuity products, funds of funds, and asset allocation portfolios.
Plan sponsors can use a model chart developed by the Labor Department or they can develop their own.
According to Goldbrum, the following information is required for each investment option in the chart:
"The value of this is that it will give participants to see comparable information for all of funds in a single place," he said.
Tom Gonnella, senior vice president of corporate development at Lincoln Trust Co., said the Labor Department's model chart is a step in the right direction, but it fails to provide 401(k) plan participants with truly personalized information. "These disclosures have fallen far short of where they need to be," he said. "It's nowhere near where we need to be to give employees a very clear sense of exactly what they are paying for their retirement plan."
For instance, Gonnella, said workers will have to calculate how much they have paid for their investments based on the balances in their respective investments. "What's required is just a percentage relative to every $1,000 invested," he said. "A participant will have to go in fund by fund and calculate what they are actually paying their retirement plan."
But Goldbrum said the cost of providing that sort of detailed and personalized information would likely outweigh the benefits. "It would be illogical to require the employer to provide more detailed information than the fund itself has to provide to its investors," he said. Plus, most retirement plan participants, he said, could easily calculate the expenses associated with their 401(k) investments. "If you know the rate and how much you have invested, it's a relatively simple calculation for you to do to get a ballpark as to what you are paying."
Plan-related disclosures
Goldbrum also said plan sponsors have to provide a description of the plan administrative expenses that may be charged or deducted from participant accounts and how they will be allocated. This could include legal and accounting expenses and anything not embedded in the investment funds that will be charged, Goldbrum said.
"The most common plan-related expenses are recordkeeping, or these administrative expenses that are somehow or another not charged to the investments," said Goldbrum. "Investment-related expenses are the most significant and largest fee item that plans and participants pay. But there are some items that might not be paid through the investments and those items, if the plan sponsor or employer elects not to pay those themselves but instead charge them to the plan, then that has to be disclosed. And the manner in which the allocation will be made also has to be disclosed."
The recordkeeper, for the record, is usually charged with the following administrative functions: providing a website, call center, quarterly statements, processing trades and the like. In some cases the recordkeeper might be one in the same as the plan provider. In other cases, it might be a separate company.
The employer gets to decide whether they are going to pay for such fees out of their own pocket or whether they want to pass those costs on to the plan, and allocated among participants.
Fees and expenses
According to Goldbrum, the quarterly statements that participants receive must disclose the amount of fees and expenses actually charged to a participant account and a description of the services for which the fees were charged.
And, if applicable, Goldbrum said, plan sponsors must also provide a notice that plan administrative expenses were paid from the operating expenses of one or more investment options, for example 12b-1 fees and revenue sharing or what are sometimes called fee offsets.
"What (plan participants) are going to see is a statement on their benefit statement that tells them if some of the recordkeeping expenses are being paid for through revenue sharing," he said. "But in the end, that doesn't change what the plan participant pays because the revenue sharing is part of the expenses of the fund. So ultimately what the plan participant pays are the expense ratios of the fund. If there's revenue sharing, that means the mutual fund company is giving some of that money from the expense ratio back to the employer to subsidize the cost of operating the plan. It's essentially the mutual fund company helping the employer pay to operate the plan. That payment doesn't change what participants. The participant will pay just the expense ratio."
Goldbrum said participants might not see the phrase "revenue sharing" on their statements, but they will see disclosure -- if there is revenue sharing -- to this effect: The administrative expenses of the plan were paid out of the operating expenses of one or more of the investment options. "The Department of Labor is going to require that on the participant's statement, the employer tell the employees if there are those offsets or if there is revenue sharing. They are not going to be required to get into the detail of how much and what fund," said Goldbrum.
Gonnella said participants will have to examine the all recordkeeping costs being charged to a plan and then determine how much of those costs apply to them. "It's going to be a bit complex," he said. "I'm not even sure most employees are going to understand it."
Of note, the Investment Company Institute and Deloitte have published research detailing the mechanics of plan fees.
What to focus on
Goldbrum said much of the information about 401(k) fees and expenses that will be disclosed under the new regulation is already generally available and not new. But what is new is the comparative chart. The chart puts all the information in one place. "It will be easier to find and easier to digest," said Goldbrum.
"It will be good opportunity for participants to evaluate the different investment options that are available to them, make sure they are invested the way they want or make adjustments," he said. "And if they don't understand the information it's a good opportunity for them to call the service provider or their adviser and look for some help. It's a good opportunity to do a checkup."
He also said participants shouldn't just focus solely on the expenses associated with their investment options. "Expenses are just one part the investment decision equation," he said. "Participants should absolutely look at what they are paying for the different investments," but also take into account their asset allocation objectives and how the funds are performing.
Gonnella agreed that plan participants shouldn't make decisions based on cost, but they should be "laser-focused on what (their) investment costs are." Finding the best funds as dictated by an investment policy statement for the lowest cost would, however, be the goal.
Gonnella also said it would be ideal for plans sponsors to show plan participants how every penny is spent and why in a 401(k) plan. "There's so much revenue sharing in this industry, it's very confusing to the lay person," he said. "It's even confusing to people in the industry sometimes. But all that should be disclosed."
