The idea of working hard and saving money for your golden years is a familiar concept. In fact, many people have retirement plans set up either through their employer or individually to help them lock away money for the glorious years of retirement. However, many employers, who are the plan sponsors, and employees, the plan participants, don’t realize that a percentage of the money that they contribute to their retirement plan is actually being taken out by their service providers to cover annual fees and, in the past, some of these service providers have charged high amounts.
All this is about to change. On July 1, the Department of Labor’s regulation 408(b)(2) will take effect. This new regulation, part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, requires that service providers supply all information about their fees, affiliates and subcontractors to plan sponsors. The purpose of 408(b)(2) is to improve fee disclosure principles and business relationships.
While fees are necessary for the many aspects of establishing and maintaining retirement plans, excessive fees have eaten away at plan assets. Fees are typically paid out to the service providers and are used to cover bookkeeping expenses, audits, legal counsel, education and a multitude of other tasks. Fees are also paid to investment managers, so assets can be properly administered and held.
Once they are informed about service providers’ and investment managers’ fees on or before July 1, plan sponsors then have to disclose this information to their plan participants by August 30th under Department of Labor regulation 404(a)(5). The main goal of this regulation is to help participants understand the fees that are associated with their retirement plans. The knowledge about fees can help participants make educated decisions regarding their retirement plans.
The implementation of fee disclosure is bound to create competition between service providers. This gives plan sponsors an ideal opportunity to research different service providers’ fees and evaluate which ones are reasonable. This new regulation requires that plan sponsors read, understand and assess the information about the plan’s fee. The plan sponsor is also responsible for reporting incidents where fees are not disclosed.
In addition to fee disclosures, another retirement plan issue that is currently being debated in Congress is ERISA 3(21). The definition of a “fiduciary,” regarding a retirement plan, is someone who has authority or control over the plan. However, Congress is looking to expand the definition of a fiduciary to include “providing investment advice.” According to the Department of Labor, this broader definition is “designed to protect participants from conflicts of interest and self-dealing.”
By making more people subject to fiduciary duties, the rule would provide greater protection for plan participants. ERISA 3(21) fiduciaries, however, do not have control over the plan, and the plan sponsor makes the final investment choice.
The Department of Labor is considering whether distribution/rollover recommendations should be categorized as “advice.” This would also give greater protection to participants since their advisor would be subject to the fiduciary standard of impartiality and prudence.
At this date, Congress has agreed to withdraw the proposal until further information can be obtained. There is a chance that changes to the definition of fiduciary might take effect this year.
The new regulations presented by the Department of Labor are precedents set forth to protect both retirement plan sponsors and plan participants and help clear up communication issues so that information is readily accessible and comprehendible. This year presents a multitude of new regulations that are sure to keep service providers on their toes and increase the knowledge of retirement plan sponsors, as well as participants.
— Rob Hoxton is the president and CEO of Hoxton Financial, Inc., a leading fee-only investment advisory firm. He is a co-founder of the Rural Financial Planning Project. He can be reached at RHoxton@hoxtonfinancial.com or at 304-876-2619.