Prepare your clients for upcoming 401(k) regulations

 

A new regulation set forth by the Department of Labor (DOL) states that 401(k) plan vendors will have until April 1, 2012, to disclose fees to plan sponsors, while plan sponsors will have until May 31, 2012, to disclose fees to employees on their quarterly statements.

 

Fee disclosure is the jumping off point for the new regulations. In 2011, 2012, and 2013, your clients will need to react to several new initiatives.

 

In 2011: 401(k) plan sponsors have a fiduciary responsibility to understand plan fees and determine if those costs are reasonable. They need to review fees associated with investments and administration as well as recordkeeping, trustee, advisory, trading, and custodial services, etc. Many of these fees are hidden, buried within annuity contracts or lengthy investment prospectuses.

 

Not surprisingly, most employers don't know how much they're actually paying; in fact, many think their 401(k) plan is free. What's worse, according to a recent DOL study, they might be sacrificing close to a third of their retirement savings to plan for expenses that are unreasonable, or in some cases, unnecessary.

 

Here's where you come in. Coordinate with your clients and their 401(k) providers to collect a full list of expenses associated with their plans. Once you've documented everything, walk your clients through the fees.

 

Make sure they understand why certain fees are in place and what the accumulated impact is over time. Next, help them decide if it's time to look into more cost-effective solutions better suited to their needs.

 

In 2012: Once fee disclosure is in place, plan sponsors will be forced to declare the fees they're paying. It will be the sponsor's responsibility to explain and justify these fees to their employees. For those employers that didn't prepare ahead of time, this could be a painful experience.

 

In 2013: Finally, another new regulation is poised to take effect that may require all businesses to offer a retirement plan to their employees. Companies that already offer a 401(k) plan will satisfy the obligation. Companies that don't may be directed to either establish a 401(k) or offer an Auto IRA account for each of their employees.

 

Auto IRAs are likely to have a lower annual contribution limit and aren't projected to allow for a loan provision. Your clients may still receive a tax break; however, it could be significantly less than if they offered a 401(k) plan. This is because contributions made into Auto IRA accounts will be made solely by their employees.

 

Help your clients plan ahead. Employers should begin evaluating their 401(k) fees now.

 

The new rules are meant to improve transparency and boost retirement savings. First, employers with existing 401(k) plans are being given time to evaluate and communicate plan fees. After that, everyone else may be expected to step up and offer employees a retirement option as well.