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The U.S. Department of Labor's final rule requiring greater fee disclosure to participants in 401(k) and similar retirement plans-starting as soon as Nov. 1, 2011-will be received by many employees as generally good news. But not by all.
It will be good for employees who work for organizations that have been informing them about the 401(k) fees they pay. It will further clarify and reinforce what they know. Yet even for these employees, it might be the first time they learn about the plan's administrative and other fees.
For employees who believe their 401(k) is free-bad news. These "you never told me" (YNTM) employees could blame their employer for allowing fees to be taken out of their accounts without telling them. For some YNTM employees, having never been told they were paying fees may matter as much or more than the size of the fees.
Most Don't Know; Management Thinks They Do
In a 2007 study by AARP:
• Only 17 percent of U.S. employees said they knew they were paying 401(k) fees.
• 65 percent believed that they paid no fees.
• 18 percent were not certain.
In other words, 83 percent were YNTM employees.
A good way to find out if you have YNTM employees is to ask them (other than HR and finance staff) a few questions, such as "Our 401(k) is free, isn't it?" and "The company pays all the 401(k) fees, doesn't it?"
It's no mystery why some people think 401(k)s are free. Things we buy have price tags and sales receipts-except many 401(k)s and health care services. And a few of the 401(k) fee explanations have been more obfuscation than clarification.
In a 2009 TransAmerica study , 73 percent of 401(k) plan sponsors said they believed that their employees had a clear understanding of fees. That could lead CFOs or chief legal counsel to conclude, "It's no big deal. Just send out the disclosure and tell employees their fees are now even easier to understand. They'll be happy."
YNTM employees won't be happy.
Fee Communication's Downside
An organization's "true colors"-how it really values its employees-show when it has to communicate bad news. When things are good, it's easy to say "We're a best-in-class employer; we have direct and honest communication."
If plan sponsors have not been communicating clearly about fees, their YNTM employees might see the new disclosure as proof that these are empty slogans. This erodes trust between the organization's most valuable resources and management. Trust is a key ingredient in retaining high-performing employees.
Some employees will be in the "I've never read that" group. Plan sponsors that have been communicating fees prominently should consider adding a phrase in the new disclosures such as, "As we have shown for several years in the highlights brochure ..." That could help dampen these employees' negative reactions.
If this will be the organization's first easy-to-understand fee disclosure, tell the leaders responsible for the 401(k), benefits and employee communications to prepare now for unpleasant questions and negative reactions.
News organizations are publicizing the coming of 401(k) fee disclosure, and YNTM employees might learn more about fees soon. They might call, e-mail or tweet their questions and concerns to the retirement plan's call center, HR staff or executives, putting them on the defensive. It makes the situation worse when answers aren't immediately forthcoming. It's worse yet when the answers differ among various sources.
Choosing Among Not-So-Good Choices
If there has been no clear fee communication, plan sponsors might need to explain the employer's role in not communicating earlier. There is no great choice in this situation, only the lesser of the bad choices.
To begin, solicit input from senior management, legal counsel, benefits staff, fund managers, the record keeper and others who likely will become involved in discussions with YNTM employees. Then consider these approaches:
• "We recently learned about the fees, and now we are telling you."
Telling employees that their employer is just as surprised as they are might deflect any ensuing anger toward the record keeper and fund managers. But sooner or later, won't employees question why the plan administrator or HR did not know about the fees? And if blame is directed to the record keeper and fund managers for not disclosing fees, won't employees expect them to be fired, perhaps sued?
• "We assumed you knew ..."
Another not-so-good approach is to include with the fund disclosures an insert that states, "This is a government-required summary. As you know, fees are taken out of your ..." Prepare for a backlash. YNTM employees could ask, "Why would you think we knew? You never told us."
• "We had to wait for the government's form."
Plan sponsors could blame the government. But they might still need to answer, "Why didn't you at least tell us something?"
• "We are sorry we didn't make this clearer before now ..."
Apologizing is honest. And honesty is better than other approaches. But being sorry might not let plan sponsors off the hook for uncomfortable questions such as "Why did you let us go on for years believing the 401(k) was free?" If it's likely that the plan sponsors will eventually have to issue an apology for not communicating, then they probably should start with one.
In addition, plan sponsors must decide how to introduce the new fee disclosure. Will they just send it out or have some communication leading up to it? Will they publish background information in the organization's newsletter (electronic or paper) about how investments are selected and the role fees play in the selection? Will the organization's leadership be involved? Will the record keeper or fund managers send employees a letter, be interviewed in a newsletter or conduct meetings following the disclosure?
Don't Overlook the Positives
Don't try to spin bad news as good news. But consider mentioning what might be some positive things.
Delivering the Tough Content
- If the organization provides automatic or matching contributions, perhaps it could show how that money was far more than enough to pay the fees.
- If the organization is paying some or all of the recordkeeping, consulting, legal or related fees, mention that.
- Don't overlook the employer-paid salaries of people who manage and support the plan.
Part of doing an effective job communicating bad news is preparing for the worst. Start by considering how to answer tough employee questions. Again, invite the benefits, HR and communication staffs, as well as representatives from the record keeper and investment funds, to help brainstorm the content. Then use their responses to write statements that deal proactively with employees' concerns and alleviate their need to ask these tough and uncomfortable questions.
It doesn't work to wish away tough questions. But plan sponsors might be able to provide enough information in the announcement so they end up addressing the issues before employees ask.
Here are some tough questions that may help plan sponsors prepare the content they want to use in the fee disclosure communication:
Keep in mind that if YNTM employees don't learn all they want to know from the disclosure, they will look for other sources of information. They might take the responses they get and spread them through the organization in conversations and social media.
- Until now you haven't told us about the 401(k) fees we've been paying. What else about the 401(k) haven't you told us?
- Why do you use "basis points," "expense ratios" and "load" to hide fees? Why don't you just call them "fees"?
- In the highlights brochure it says "you do not pay sales fees." But it never says we pay any other fees. Why did you mislead us?
- My neighbor pays less than $5 for every $1,000 invested. Why are we paying nearly twice that? Are our funds twice as good? And if not, can we get the same funds and fees my neighbor has?
- If I use a fund that has a higher price, will I get more value? Or should I just choose the fund with the lowest fees?
- In the 10 years that my investments went down, did you stop taking out fees?
- Why do I pay more just because I have a larger account? I'd get the same services if I had half as much.
- Show me where I signed something saying I agreed to pay anything. And tell me who got our money and what they did with it.
- You say the fund manager has finally provided a detailed breakout of the fees we pay. Why didn't you demand an accounting long ago?
- We were never told in simple terms that fees were being taken out. Can we sue to get our money back?
Department of Labor Model Disclosure
The DOL offers Model Disclosure Charts that employers can follow. It's a template to present fee information, historical performance comparisons of the investment options and select benchmarks, as well as a summary of any annuity option.
Like many investment fund summaries, the DOL's model sends a mixed message. It has the obligatory "don't rely solely on past performance in judging ..." type of statement. Then it shows only history. It's curious that one of the most agreed-on principles of investing is missing-asset diversification.
Adding a few words about each fund's goals and diversification would be useful along with fee information.
Also missing from the model is an ingredient required in good employee communication: an answer to "What am I supposed to do with this information?" Unless this is addressed, will employees believe that the communication is subtly telling them to pick the cheapest fund?
Consider including a statement such as "Although low fees are an important consideration, some funds with higher fees might better meet your investment needs and goals. The plan offers choices so you can select the mix of funds or fund that you find works best for you."
All fee disclosure communication should be reviewed by legal counsel and service providers.
An Unfortunate Distraction
Fees should have been communicated clearly to employers and employees 20 to 30 years ago. Unfortunately, this communication, which is part of the evolution of 401(k)s into more-effective retirement plans, now risks turning some employees against the plans because of a "gotcha" over fees. And it comes when employees need to be saving more for retirement, not less.
Despite past omissions, starting now to be clear and forthright about fund and plan fees can promote trust and encourage employees to use their employer-provided plan to save for their retirement needs
401(k) Plan Fees for Employers
A participant-directed retirement savings plan, such as a 401(k) plan, is an important tool to help your employees achieve a secure retirement. As part of offering this type of program, you or someone you choose must select the investment options from which your employees will choose, select the service providers for the plan, and monitor the performance of the investments and the provision of services. All of these duties require you to consider the costs to the plan. This brochure can help you ask the right questions to better understand and evaluate the fees and expenses related to your plan.
You or the person you select to carry out these responsibilities must comply with the standards provided under the Employee Retirement Income Security Act of 1974 (ERISA). This federal law protects private-sector pension plans. The law's standards include ensuring that you act prudently and solely in the interest of the plan's participants and beneficiaries.
Understanding fees and expenses is important in providing for the services necessary for your plan's operation. This responsibility is ongoing. After careful evaluation during the initial selection, the plan's fees and expenses should be monitored to determine whether they continue to be reasonable. While ERISA does not set a specific level of fees, it does require that fees charged to a plan be "reasonable."
Of course, the process of selecting a service provider and investment options should address many factors, including those related to fees and expenses. You must consider the plan's performance over time for each investment option. This selection process and continual monitoring will make it possible for your employees to make sound investment decisions. As part of your evaluation process, here are 10 questions to help focus your consideration of fees and expenses:
* Have you given each of your prospective service providers complete and identical information with regard to your plan?
* Do you know what features you want to provide (e.g., loans, number of investment options, types of investments, Internet trading)?
* Have you decided which fees and expenses you, as plan sponsor, will pay, which your employees will pay, and/or which you will share?
* Do you know which fees and expenses are charged directly to the plan and which are deducted from investment returns?
* Do you know what services are covered under the base fee and what services incur an extra charge?
* Do you know what the fees are for extra or customized services?
* Do you understand that some investment options have higher fees than others because of the nature of the investment?
* Does the prospective service arrangement have any restrictions, such as charges for early termination of your relationship with the provider?
* Does the prospective arrangement assist your employees in making informed investment decisions for their individual accounts (e.g., providing investment education, information on fees, and the like) and how are you charged for this service?
* Have you considered asking potential providers to present uniform fee information that includes all fees charged?
* What information will you receive on a regular basis from the prospective provider so that you can monitor the provision of services and the investments that you select and make changes, if necessary?
Provide all prospective service providers with complete and identical information about the plan and what you are looking for so you can make a meaningful comparison. This information includes the number of plan participants and plan assets as of a specified date.
Consider the specific services you would like provided. For example, the types and frequency of reports to employer, communications to participants, educational materials and meetings for participants and the availability and frequency of participant investment transfers, the level of responsibility you want the prospective service provider to assume, what services must be included and what are possible extras or customized services, and optional features such as loans, Internet trading and telephone transfers.
* Make informed decisions in selecting and monitoring your plan service providers and investments.
* Fees are just one of several factors you need to consider in your decision making.
* All services have costs. Compare all services to be provided with the total cost for each prospective provider.
* Consider obtaining estimates from more than one service provider before making your decision.
* Cheaper is not necessarily better.
* Ask each prospective provider to be specific about which services are covered for the estimated fees and which are not. To help in gathering this information and in making equivalent comparisons, you may want to use the same format for each prospective provider. See EBSA's Web site for an example of a uniform fee disclosure format to assist in your selection and monitoring process.
* Fees and expenses can have a significant impact on your employees' retirement savings.