Transparency is a major goal of two Department of Labor initiatives which will affect most retirement plans, particularly the roughly 500,000 participant-directed defined contribution plans, such as 401(k) plans, in America today. Both initiatives came to fruition this summer.
The first initiative requires most service providers of retirement plans (whether or not participant-directed) to disclose their services and fees, including those paid by third-parties, such as other providers or investment houses. The requirement to disclose indirect compensation includes the requirement to reveal who is paying the compensation and why. Some providers must also disclose information relating to some or all of the plan’s investments.
The rules potentially affect record keepers, brokers, advisors, third-party administrators, accountants, consultants, fiduciaries, and other professionals who serve the plans. The first disclosures were due by July 1, 2012, and must now be made before entering into, extending, or renewing an arrangement with the plan.
These disclosures go to the fiduciaries that are running the plan, such as the plan administrator, who have the power to hire, fire, and negotiate compensation with the service provider. The hope is that this transparency will let the fiduciary be a better shopper, and better understand the conflicts of interest inherent in certain service relationships. The fiduciaries can be held accountable for analyzing and understanding this information, and using it to reduce plan expenses and prudently select providers and investments.
The plan administrator has an additional duty to use this information, and this brings us to the second initiative. The administrator of a participant-directed plan is now required to assemble a series of disclosures to participants and beneficiaries. These new disclosures will explain the investment options available to participants, and provide basic information in the form of a comparative chart. The administrator must also explain plan expenses that may be allocated to participant accounts, as well as participant’s duties, opportunities, and options in managing the investments in their account.
The hope is that this level of transparency will make the participants smarter investors, or at least help them understand how their choices can affect their ultimate retirement savings. For most plans, the first participant disclosures were due August 30, 2012, and must be provided at least annually thereafter. Quarterly, the plan must disclose the expenses which were actually allocated to participant accounts.
The new rules have spawned many questions, as those involved try to adjust their workflow and networks to address them. In some cases, the answers have generated more questions. There are proposals to further change the rules, and more proposals are likely in the future. But the Department of Labor is pressing forward with the existing deadlines, convinced that participants are losing money without convenient access to this information.
Will the data flow these initiatives mandate ultimately prove helpful, or simply add to plan costs and paperwork without corresponding benefits? This will depend heavily on how fiduciaries and participants use the resources that will now be available to them.