The new 408(b)2 disclosure regs have been long awaited, and present a great opportunity for companies to better understand and benchmark the fees associated with their 401(k) provider. Additionally, it will be require 401(k) service providers to better articulate value in light of the fees they charge. ERISA requires plan fiduciaries to review the fee structure of, and I paraphrase, “reasonable fees for reasonable service.” What is reasonable? That is for plan fiduciaries to determine via the value proposition delivered by 401(k) service providers, which includes recordkeepers, TPAs, custodians, advisors and yes, participant advice providers.
While the impact of this disclosure does not directly impact us as a 401(k) participant advice provider since we have been transparent and conflict-free from the start, there are a lot of benefits for the companies and employees we serve. Here are a few:
- Service Providers Must Disclose Whether They are Fiduciaries – There is so much confusion over this issue, it is great to see the regulations require this so to clarify for plan sponsors who is and who is not acting as a fiduciary. Most plan fiduciaries have been confused by this over the proliferation of the terms used by service providers such as fiduciary, co-fiduciary, fiduciary warrant and especially advice, which automatically makes someone a fiduciary. Per InvestmentNews.com:
“Along with requiring bundled service providers to break out costs of their record-keeping services, the new regulation also requires providers to disclose whether they are acting as fiduciaries to plans.”
- Disclosure Simplifies Plan Reviews and Benchmarking – Understanding value will be much easier if there is some standardization and definition of what services are to be included under each term. Making an apples to apples comparison is critical for making a large decision on a large purchase, such as a 401(k) service provider.
- Independence and Conflicts to be Better Articulated – Understanding the inherent conflicts of interest with various service providers. Per InvestmentNews.com,
“Under the rule, consultants — and many plan service providers — will be required to reveal to DB and DC plan sponsors hitherto undisclosed compensation they are receiving, including any revenue sharing or finder’s fees.”
- Transparency Improves Clarity – It is obvious, but understanding what plans are paying for various providers has been extremely difficult to understand for many companies. Including us. We do not do plan-level consulting work, but when we are working on a plan that has a fiduciary plan consultant, the quality of the plan has a distinctly different flavor than the plans that do not. Service and value are the at the crux of the conversation, which ultimately resonate in greater outcomes for participants. Per InvestmentNews.com,
Alison Borland, retirement strategy leader at unbundled provider Hewitt Associates, Lincolnshire, Ill., said: “The regulations will put different types of service providers, including bundled and unbundled providers, on a level playing field.”
“Ultimately that means better transparency, more negotiating power and lower total costs for plan sponsors and plan participants.”