1. 401K PROADVISOR
- ‹#› -WEALTH & PENSION SERVICES GROUP, INC.WWW.401KPROADVISOR.COM
Disclosure is coming to 401k’s - and not a moment too soon. With
participants footing the bill for their own 401k plans - it’s an industry
in need of a long overdue makeover.
By William Kring, CFP®, AIF®
Who knew? Who knew that it has been the participants that have footed the bill in 401k plans all
along? All fees and charges conveniently wrapped up in a ball, and in most cases, bounced the way of
the participant.
Plan sponsors of course have a legal duty to make sure that the costs are reasonable. After all, they are
fiduciaries, meaning they must act as a prudent man would, and oversee the plan for the exclusive
benefit of the participants. But are company HR people equipped to untangle the intricacies of 401k
pricing? With years of industry experience and training as a fiduciary, even I must sometimes take a
long hard look at a plan to unravel the fees and expenses. So if the company offering the plan can’t
figure out pricing, and if the participants are paying for it, what are the chances that plans are
effectively priced?
Well, the beginning of the end is up on us. Two new rules brought by the DOL starting in 2012 will
shine a light on plan costs for both plan representatives (companies) and participants. The first rule is
408(b)(2). This rule requires that all service providers provide explanations for their fees and who they
share them with. They must also state whether that are acting as a fiduciary. Most plans today are
being serviced by non-fiduciaries, which will be a surprise to most companies. Remember that a
fiduciary must act in the interest of someone else. Now for the first time, plan sponsors will have a
clear understanding of fees, who is receiving them and what level of obligation each provider has to
the plan.
The Second rule is 404(a). This rule will require service providers to provide the participants a quarterly
accounting of the costs of the plan that they pay each quarter.
As these facts become known, expect two things; first, flurries of industry changes, as major service
providers seek ways to enforce their value and modify their pricing models. Second, expect some
shocked participants, with a fair amount of complaints.
The good news for participants is that the net effect of this should be a lowering of prices. A good
thing, since no-one can argue that fees don’t matter in investment performance. Just a one-half
2. 401K PROADVISOR
- ‹#› -WEALTH & PENSION SERVICES GROUP, INC.WWW.401KPROADVISOR.COM
percent reduction in a participants’ account can mean thousands of dollars more in their balance at
retirement.
Secondly, new trends will emerge as standard practices. These new standards already exist, but have
only been used by top tier fiduciary advisors and a few select vendors who are not asset managers, and
therefor don’t have conflicts. Going forward, plans should expect and ask for complete transparency of
all pricing, full credit back to the plan of all revenue sharing, elimination of commission, finder’s fees
and wrap fees, and the assistance of a fiduciary advisor who is willing to accept much of the
responsibility for investment selection.
With the added transparency, pricing comparisons can then be broken down to all of the various parts
of the retirement plan (administration, record keeping, investments, advice, and general non- fiduciary
services) to ensure that each cost is reasonable for the services being delivered. For instance, plans will
have to have good investment choices that stand on their own merit. The remaining components of
running the plan will need to be priced to reflect their true value. No more combining plan costs into
investment costs.
And as for new pricing methods, expect a gradual shift away from asset pricing. With asset pricing, the
cost of the plan will rise or fall based on assets. How can a fiduciary justify fair fees when they change
with the whim of the market or with additions or withdrawals? Most plan services are dependent on
factors besides asset levels. The only fair way to price many plan components that are not related to
investment or participant performance, is through fees that are tied to the task at hand. Generally
these fees would be flat fees or per-participants fees.
These new rules are a great start to improving an enormous industry that has gone nearly unchecked
since it was born, an industry that has far reaching effects on the future of our workers and our
country. We need our workers to save well for retirement, a fact no -one disputes. We also need to
give them a fighting chance.
This is for information purposes to be used as a guide only. It should not be considered as legal advice. Consulting an ERISA
attorney is recommended before taking action in these areas.
William Kring, CFP, AIF, is chief investment officer and accredited investment fiduciary for Wealth and Pension Services
Group, Inc. an SEC registered investment advisor. Kring is also the founder of 401k ProAdvisor, a full service retirement plan
manager, where he assists ERISA retirement plans in meeting their fiduciary responsibilities through fiduciary consulting
services, monitoring, reporting services, and investment management. For comments or questions, email to
bill@401kProAdvisor.com