Administration May 5, 2017

Participants Still Lack Understanding of Fee Disclosures

Years after the DOL required fee disclosures be made to retirement plan participants, participant awareness continues to lack, but improvements may be coming.
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The mandatory fee disclosures under 408(b)(2) and 404(a)(5) aimed to provide both plan sponsors and participants with transparency and communication regarding investment fees; services; compensation; and more.

But while the disclosures attempted to create a clarity among providers, plan sponsors and participants, it was met with confusion instead. When the Department of Labor (DOL) fee guide proposal issued for plan sponsors in 2014 called for shorter summaries to omit lengthy, 408(b)(2) rules, no simplified guide was issued for participants. If a plan sponsor found trouble scanning through lists brimming with services and fees, how did—and do—the participants react?

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“I suspect that some plan participants use it as best as they can, and probably a lot [of participants] throw it away,” says Aron Szapiro, director of policy research at Morningstar. “Or they don’t look at it until there’s some decision point, and then they need a little extra help to contextualize it.” The issuance of the first fee disclosures to participants got less attention than anticipated.

While 2012 reports emphasized education and better communication between employers and workers to improve participant understanding of fees, a conversation with then Assistant Secretary of Labor Phyllis Borzi, with the DOL’s Employee Benefit Security Administration (EBSA), revealed service providers are not following the rule to the letter. According to Borzi, the agency did not intend for providers to offer a master list of services and fees and have plan sponsors figure out which services they are using and paying for. Also, she said, it doesn’t serve the purpose of the regulations if the plan sponsor doesn’t have to understand the fee information it is provided because providers take care of everything for 404(a)(5) participant fee disclosures.

Although education on fee disclosures may be essential at certain points, to Jim Sampson, director of retirement advisory services at Hilb Group Retirement Services, it’s identifying the overall value in a simplified manner—and focusing on that value instead of costs— that drives participants and investors to engage in their plans. Sampson urges plan sponsors and participants to focus on the real value associated with the plan.

“The sponsor decides where the money goes, who the service providers are, and the employee’s stuck with it for better or for worse,” he says. “The whole purpose of having this plan is so that employees can retire on time with enough money. There’s a whole bunch of ways to accomplish that, and fees are part of the puzzle, but it’s not the entire puzzle.”

Szapiro agrees. “They could provide educational material, but a lot of participants aren’t really going to make sense of this,” he says. “People want the simplicity of something that just sort of says, ‘yeah, this is good. This is also good. This is better,’ that can do a lot of that backend work for them.”

Sampson believes that while fee disclosures have benefited those aware of fee charges, not every participant has—or will—keep an eye of on these charges. “That’s what the plan’s fee disclosure has done, it’s opened the eyes to people who pay attention, he says. “Unfortunately, not everybody pays attention.”

NEXT: Proposed Actions and Tools to Help Participants

Will Hansen, senior VP of retirement and compensation policy at the ERISA Industry Committee (ERIC), based in Washington, D.C., believes transparency and awareness start with the engagement between a plan sponsor and participant, especially through financial wellness programs.

“If you engage with an individual at the very basic level of even basic budgeting types of exercises, hopefully you can build off of that foundation and get to the point where you then get a little into the weeds of explaining to a person; what’s the basis point (bp) and how does that basis point impact your long-term financial situation when it comes to your retirement,” he says.

He continues, “As long as employers continue to expand upon these financial wellness programs, hopefully that will engage more people to take notice of the fees that are associated with the retirement products.”

While a struggle in understanding disclosures may continue to be prevalent, current actions conducted by the ERIC hopes to diminish puzzlement in fee breakdowns, according to Hansen.

“The ERISA Advisory Council, which is an arm of the DOL, is looking at disclosures, that’s one of the projects it’s focused on,” he says. “Hopefully the DOL can take the advice of plan sponsors and how the disclosures need a little work, but there are probably some very simple tasks that can be completed to simplify even more the information that’s required to be provided.”

The Depository Trust & Clearing Corporation (DTCC) has created the Retirement Plan Reporting (RPR) solution, to increase transparency in fee disclosure compliance requirements, including 408(b)(2) and 404(a)(5). The tool, offered through DTCC’s National Securities Clearing Corporation (NSCC) subsidiary, is said to provide solutions with reporting retirement plan level information to mutual fund investor participants.

Proposed revisions to the Form 5500 implemented by the DOL last year can further participant understanding regarding investments and fees, says Szapiro.

Besides allowing the evaluation and comparison of a variety of retirement plans, the proposal would simplify indirect compensation reports regarding 408(b)(2) disclosure requirements [to plan sponsors], and in turn, benefit participants by improving transparency in the “management of their assets or revenue-sharing for administrative costs,” writes Szapiro in a Morningstar report.

“Many plan sponsors would benefit from more transparency around what other plan sponsor are paying,” he says. “Anything you can do to sort of contextualize what these fees mean, over time, is going to be valuable.” When plan sponsors understand fees, they can better explain them to participants.

He adds, “It’s very difficult for people to convert percentages into actual fees, but when it’s illustrated with, ‘if you invest this much this is what you’re paying annually with us, compared to what some of the alternatives are,’ then that could work.”
Investing May 4, 2017

Plan Sponsor Opportunity as Asset Managers Shift

One study suggests asset managers sticking to old sales and service models will very quickly start to fall out of favor among DC plan clients and other institutional investors. 

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In the midst of market volatility and projections of a prolonged low-return environment, asset managers are seeking new ways to reach institutional investment buyers, including defined contribution (DC) retirement plans.

New research from Casey Quirk, a practice of Deloitte Consulting LLP, suggests this trend should present tremendous opportunity for retirement plan sponsors to take advantage of new innovations. On the flip side, it will be more important than ever for plan sponsors to monitor the marketplace of investment products to ensure they are still accessing top quality offerings.

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Casey Quirk projects that investment managers who do nothing to modernize their sales and service approaches could face more than $770 billion in collective outflows through 2021. However, the firm projects that those which transition their capabilities to serve the evolving preferences of institutional buyers can expect to see inflows of as much as $1.5 trillion during the same time period. This dramatic flow of capital could significantly reshape the asset management landscape retirement plans and other institutional investors operate in.

Casey Quirk suggests asset managers that haven’t traditionally sought to do business in the space will increasingly seek “new” institutional buyers such as DC plans, while significantly adapting their offerings and sales structures to better serve clients in “this saturated, competitive environment.”  

David O’Meara, a senior DC investment consultant at Willis Towers Watson, notes that as the retirement services industry shifts from the defined benefit (DB) to DC model, many asset managers are finding their products don’t exactly fit well into a DC plan sponsor’s investment menu. Product innovation can change that. O’Meara says managers will likely venture to create new vehicles like institutionally priced mutual funds or collective investment trusts (CITs).

“In the case of a CIT, the operational costs are lower and so they can operate on a more cost-effective basis which is crucial in today’s DC environment,” O’Meara says.

NEXT: Change doesn’t come easy 

Of course, this evolution won’t come easy for all asset managers—and there is a distinct chance that new players could emerge to challenge those that have traditionally been successful serving DB and DC plans.

O’Meara notes that many managers today are examining the best approaches to building target-date funds (TDFs), which continue to dominate new flows in the DC retirement planning market. Leading investment product manufacturers are also focused on serving the shift to greater use of passive investments, which coincides with a growing client focus on managing fees and increased skepticism about the long-term value of buying active management.

Considering all of this, O’Meara says sponsors can work with asset managers and adviser resources to “negotiate better fee terms or encourage managers to launch vehicles with a better fee structure from the retirement plan perspective … It’s a good opportunity for DC sponsors to revisit their managers and the fees associated with them.”

Jeff Levi, principal at Casey Quirk, tells PLANSPONSOR that overall asset managers are also responding to demographic shifts and investor preferences for different exposures like environmental, social, governance (ESG) parameters, which is becoming increasingly popular among Millennials, studies suggest. Although the conversation about building lifetime income through DC plans is still in its nascent stages, new in-plan retirement income vehicles could also act as entry points for asset managers looking to enter or improve their offerings in the DC space.

“Defined contribution has been designed as an asset accumulation system and has not really transitioned into a retirement vehicle,” O’Meara concludes. “Now, we’re starting to see retirement income solutions come to market. It’s certainly an area that we see taking hold in the coming years.”

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