By the time 408(b)(2) fee disclosure regulations went into effect July 1, 2012, much had been done already on the part of service providers to communicate their fees to plan sponsors and participants alike, say many industry insiders. However, one year later, there is still much work to do when it comes to preparing the American workforce for retirement.
At this time last year, the mindset of many advisers was confident preparation. That was thanks to a great deal of time spent making sure clients knew their value proposition, says Tim Minard, senior vice president, U.S. distribution for The Principal, adding that the large majority of them had already disclosed fees.
Still, "the reality of it was some were more ready than others," he says. "But at the end of the day it didn't cause a 180-degree swing from no disclosure to full disclosure."
Conversations around fee disclosure may not have originated with the 408(b)(2) regulations, but the regulations have brought it to the spotlight. "Nowadays there's nobody who doesn't talk about it," Minard says. "Maybe that's the one outcome of it, that fee disclosure is much more a top-of-mind topic in talking about how we disclose our fees as opposed to, 'Do you disclosure your fees?'"
Work to do
Even so, because the legislation had no requirement as to how reporting was to be done, disclosure has been inconsistent at best, says Lee Topley, managing director, Unified Trust.
"The disclosure requirements, while the intention was noble, they have done absolutely nothing to change participant behavior or even the plan sponsor understanding of the total fees associated," he says.
Topley recalls a client who received a 72-page disclosure document. "How is the plan sponsor going to understand that? We believe a lot of service providers stretched the rules and reported all of the fees but made it almost as difficult as finding how much fees are inside of a prospectus," he continues.
Additional guidance from the Department of Labor on a summary disclosure document format was initially expected in May, but as of press time has not been released. "Who knows when that will actually happen," adds Topley. "It could be a while."
A template such as a chart that would show which fund expenses can be found on what pages of a disclosure document would be helpful, since currently "you really have to dig into these documents to find it," he says.
Consequently, there's been no real change in participant behavior. They "didn't understand what they were looking at," Topley adds, it "really didn't open their eyes to how much fees they're actually paying."
Clients are discussing fee disclosure with Chad Parks, president and CEO of The Online 401(k), and his team not because of the legislation itself, but because of the media attention on the matter, he's found.
"Just because they receive another document, one, are they going to be able to know what it is? Two, are they going to cut through the noise? And three, are they going to be able to interpret it? Usually the answers to those are no, no and no," says Parks.
Overall, fee disclosure has been slow to penetrate plan participants' minds, he says, but Parks believes that those who thought it would be a flash in the pan are not seeing the big picture.
"I thought that we would really start to see the effects of it in 2013 and probably more so in 2014," he says. "The reason is because it takes time to build awareness. It takes a lot of impressions. How many times do you have to see something before it finally starts to resonate with you? So as people get their annual disclosures and as employees start to dig into their statements more that's where we're going to see that effect."
As Mike Hadley, partner, Davis & Harman LLP, points out, most participants don't have a lot of control over their fees anyway. "It's the plan fiduciaries who are the primary gatekeeper of reasonable compensation and ensuring that the investments are good investments for their workforce," he says.
Mike Alfred, co-founder and CEO of BrightScope, agrees. "Consumers can vote with their feet and move from one fund in small cap to another fund in small cap, but if they're all high cost it's not necessarily a huge change," he says. "If a plan sponsor says, 'We're going to move from an insurance company product to a Vanguard product,' that's a big shift and it affects every single investor who's in that plan."
Plan sponsor action
From the consumer perspective, "the average person hasn't felt any sort of visceral change because of fee disclosure," Alfred continues. "The average person didn't get any smarter. They didn't make any better decisions, necessarily."
A lot of the action has been behind closed doors where "plan sponsor committees, armed with this information, have realized, 'Wait a second. We are not where we need to be in terms of our fees,'" he says. "And not just holistically across the plan, but within different asset classes. These funds probably need to be replaced with something a bit more efficient."
This has resulted in changes in the product mix where service providers "have been really aggressive" in rolling out lower-cost bundled plans.
Plan sponsors don't have the time to dig for fee information, "but if they get it delivered to them in a clear format for the first time and they also have a targeted pitch from a lower-cost provider coming through the door at the same time then they'll be more open to that conversation," Alfred says.
Regardless of fee disclosure, the employer's view of their retirement plan "is somewhat of a constant moving target," says The Principal's Minard.
A number of factors in the last two to five years have caused "actions and reactions" on the part of plan sponsors, such as the financial crisis and constant talk about fees, adds Minard. "The amount of scrutiny driven by employers and advisers on their service provider fee structures was as intense as anything we have seen," he says. "When clients went to RFP it seemed that new case pricing was much more discounted than existing case pricing."
The consequence was changes to services delivered and prices charged, but "I think now a lot of service providers would agree the race to the bottom on expense structure has been completed," Minard says.
Now, attention has turned to other expense areas of the plan, such as adviser compensation, he adds.
Davis & Harman's Hadley points out that the overall focus on fees has brought attention to the importance of benchmarking "and to make sure that the fees of the plan are reasonable," he says. "But it's only a matter of degree. The fiduciary obligations didn't change at all. Fiduciaries were monitoring their service providers and the service providers compensation before this disclosure came out, and they've been doing it since."
Future outlook
It's a good thing, too, because Hadley's seen "a heightened focus on documenting the process that you went through with the expectation that at some point you may need to defend the process that you went through to be comfortable that your service provider's fees are comfortable."
While he doesn't have the sense that the number of DOL audits will necessarily increase in the near future, he points out that DOL has stated that when a plan is selected for audit they will be looking to see that plan fiduciaries went through a process to ensure fees are reasonable. There "will be an increased focus when there is an audit," he says.
Plan sponsors have a responsibility to make sure they have received the right data and follow the proper process to review 408(b)(2) disclosures to determine if they are reasonable.
"I do think what's going to happen now with DOL audits is when the auditors walk in one of the first documents they're going to ask for is, 'Show me your 408(b)(2) disclosure and also show me what your process was for you to verify that in fact you got what you were supposed to get,'" adds Unified Trust's Topley.
Still, he doubts plan sponsors will actually be able to meet that requirement, since he believes it wasn't very well communicated. "A good adviser will take that on and help the plan sponsor realize these are the responsibilities I have as a fiduciary of the plan," he says.
Fee disclosure and adviser value have been top of mind for some time now, but Minard says now is the time to focus on outcomes. "There's this growing interest ... to have a focus on the right thing, which is plan outcomes," he says, "and how do we impact contributions, expenses, behavior such that the outcome a participant has after a number of years working is where you want them to be? If that's attributed to fee disclosure, DOL audits being more prevalent, whatever the cause, that's a good thing."
