According to the Investment Company Institute, as of 12/31/2011, over $3.1 trillion was held in employer sponsored 401(k) plans, in the U.S. This figure being all the more impressive when you consider the advent of the employer sponsored 401(k) plan was just over 30 years ago. Over the years 401(k) plans have evolved to meet the service demands of plan sponsors and participants. Technology has helped foster the development and evolution of the service features offered by most plans. One such development was daily valuation. Until the late 1980’s, most plans were only valued quarterly; which also meant that participants could only make changes to their investment selections quarterly. The outcry for daily valuation came after the crash of 1987. Many participant investors rushed to capitalize on the 20+% decline in market value in October, 1987; only to later find out that their adjustments couldn’t be facilitated until the end of the year; at which time the market had recovered significantly.
We are on the cusp of another such development, that being in the form of service and fee disclosure. Whether bundled or unbundled, 401(k) plans have several parts, with each part representing a service element that carries its own layer of fees. Given the length and complexity of many plan service agreements, fees can often either be hard to quantify or ‘appear’ to be downright hidden. What services are being offered (and which are not) by the provider and their fiduciary status, is often unclear in service agreements as well. The upcoming Department of Labor (DOL) regulation related to ERISA section 408(b)(2) seeks to clarify these ambiguities. The 408(b)(2) regulation requires service providers to disclose the following in their written agreements:
- Services: What will be provided and what will not
- Cost: Compensation and sources of compensation
- Status: Does the advisor accept fiduciary responsibility (note: if the agreement is silent on fiduciary status, the provider is not accepting fiduciary status)
The last disclosure brings up an interesting point, since a fiduciary is defined as one who legal and ethical responsibility to look after other peoples’ money. With regards to 401(k) plans, fiduciaries should have a singular duty of loyalty, meaning they must serve the best interests of plan participants and beneficiaries. Plan sponsors are fiduciaries. Service providers should accept fiduciary responsibility as well. Though, many do not. ABFS would be glad to review your 401(k) service agreement and do a service and fee analysis, for no cost or obligation.
408(b)(2) is not a panacea; but it is a step in the right direction. It begins to address the shortcomings of information being disclosed from service providers to plan sponsors. In August, regulation 404(a)(5) will take effect; which speaks to information being disclosed from plan sponsors to participants. Check back in the coming weeks for more information.