Compliance June 5, 2012

Fee Disclosure Top of Mind for Plan Sponsors

June 5, 2012 (PLANSPONSOR.com) - Plan sponsor attendees of the 2012 PLANSPONSOR National Conference said new fee disclosure rules is the biggest issue that keeps them up at night.

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Michael Barry, president of Plan Advisory Services Group, said fee disclosures started as a project by the Department of Labor (DOL) to help participants make better investment decisions, but it has turned into a focus on helping plan sponsors make better provider choices and investment policies. He cited the recent court decision in ABB v. Tussey (see “Employer to Pay for Failing to Monitor RK Costs”); when a sponsor gets knowledge that it is paying more for a service than a consultant reports is the average, the sponsor must act on that information as soon as possible.  

When sponsors get fee disclosure information from providers, Barry said they need to ask three questions: 

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  • Did they tell me what I need to know? 
  • What did they tell me? 
  • What do I need to do about it?  

Barry suggested plan sponsors retain the services of an Employee Retirement Income Security Act (ERISA) attorney. Plan sponsors must compare their fees with industry benchmarks and document the process of comparison.  

On the positive side, Mark Davis, senior vice president and financial adviser at CAPTRUST Financial Advisors, contended sponsors should be confident that fee disclosures will arm them with the information to secure improved fees and less conflict of interest with vendors. In addition, he said he is optimistic this will drive prices of services down. The key for plan sponsors will be to understand how to read the information they are given. He noted that plan sponsors must fire providers that do not provide the right information.   

According to Barry, the timing of the decision in ABB v. Tussey is right to offer more insight to plan sponsors. A focus of the case was revenue sharing, about which most plan sponsors are in the dark. Plan sponsors should look for this in the fee disclosure information they are given.  

In addition, the ruling shows that investment policy statements (IPS), while good practice, can also get sponsors in trouble. The court ruled that ABB did not follow its IPS when deselecting and selecting investments. Barry noted that, in creating an IPS, plan sponsors are creating new rules they must follow, or risk being sued.
Benefits June 5, 2012

401(k) Plans Can Move to ‘3.0’ Level

June 5, 2012 (PLANSPONSOR.com) - Small changes to a company’s 401(k) plan—including decreasing the eligibility waiting period or increasing the match—could encourage employees to set the bar higher.
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At the 2012 PLANSPONSOR National Conference in Chicago, Mark Iwry, senior adviser to the secretary and deputy assistant secretary (retirement and health policy), U.S. Department of Treasury, referred to this new level of 401(k) as the “3.0 version.” The “2.0” version, he said, began in the late 1990s and focused on features like automatic enrollment and target-date funds (TDFs). The next generation of 401(k) plans—the 3.0 version—could take things a step further.    

Increasing the use of automatic enrollment is one way to do so. About half of the 401(k) plans in the U.S. still do not have automatic enrollment, and when it is adopted, it is often a “very rudimentary version” with a 3% default contribution, Iwry said.   

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Iwry suggested several other changes to help achieve the 401(k) plan “3.0.”   

  • Restructure employer match. Some plan sponsors have been experimenting with a “stretch the match” approach, Iwry said. Rather than a company matching 50 cents on the dollar for the first 6% of an employee’s pay, employers could stretch the match up to a higher percentage of pay. For example, Iwry said, matching 33 cents on the dollar, but up to 10% of pay.   
  • Give lower-paid employees a higher rate of match. Lower-paid employees, who traditionally save less for retirement, will have more incentive to save. This approach can also help a company with employee retention and recruitment, as well as non-discrimination testing, Iwry said.  
  • Decrease eligibility waiting period. If companies have long waiting periods before eligibility because of turnover, Iwry suggested they examine whether they can decrease the waiting period and still be OK. Another option is allowing employees to contribute sooner, but with a delayed employer match.  
  • Examine portability. Iwry suggested employers examine if their 401(k) plans are accepting rollovers to the extent that they can. “[Are they] being overly cautious about rollovers from previous employers or IRAs?” Iwry added.  

 

Iwry also suggested plan sponsors focus on the automatic enrollment of non-new hires, as well as explore the possibility of employees contributing unused vacation or sick pay to their 401(k) plans. Plan sponsors can also extend their automatic escalation rate beyond 10%, he added.  

“These are incremental steps,” he said, “but one or two could make a difference.”

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