The Prudent Fiduciary

Scott Pritchard | Principal

A look at the major issues that are shaping fiduciary best practices today.

The Novelty of Fee Transparency

October 2010

Much has been written in the press lately about a seemingly novel idea:

The notion that 401(k) plan sponsors and participants should actually know how much they are paying!

After years of wrangling, and against staunch opposition from Wall Street, the Department of Labor (DOL) has finally issued the third and final step in a series of regulations aimed at ending the long-running ruse of hidden fees in 401(k) plans.

These regulations have taken the form of a three-step process:

Step One: The enhanced 5500 reporting for 2009 requires service providers to disclose to the IRS, and ostensibly to plan sponsors, the compensation received from retirement plans after the fact.

Step Two: Regulation 408(b)2, which will lose its current “final interim” label when it goes into effect July 16, 2011. This regulation will require service provider compensation to be disclosed to plan sponsors ahead of time.

Step Three: Last but not least, the just-issued “Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans” rule will require that those same fees and expenses be clearly disclosed to 401(k) participants. This regulation goes into effect for plans with year-ends after November 1, 2011.

All of this regulation is designed to mandate something that seems to be so integral to virtually every other business transaction:

Transparency.

When you buy a gallon of milk, you know that in return for your $3.89 you will receive 16 cups of milk. Even with the fairly convoluted process of buying a car, you ultimately know your “drive-it-off-the-lot” price. But for years, the vast majority of plan sponsors and participants have had no idea how much their 401(k) plans cost.

Now that fee transparency will be mandated, the great unknown is how plan sponsors and participants will respond to this newfound knowledge. Will plan sponsors and participants be appalled with the previously hidden fees and expenses once revealed in the clear light of day? Will they be motivated to make changes to reduce costs? Or, will they simply allow the ever-present inertia that plagues most plans to rule the day? Only time will tell.

But one thing is for sure. Independent, fee-only advisors will no longer have to compete on an uneven playing field. Going forward, plan sponsors will be able to compare service providers on a true apples-to-apples basis. And the ultimate beneficiary will be the 401(k) participants who depend on fiduciaries to truly act in participants’ best interests.

Email A Friend Print This Article