Big shifts may be coming in how retirement plans are managed after the Labor Department announced the final version of its rules under Section 408(b)(2) of ERISA, which require broker dealers to disclose their services and fees to plan sponsors for individual plans.
Labor further extended the effective date for these rules to July 1, the department says, in order to give plan sponsors more time to comply. Under these new regulations, the emphasis will be on service providers to provide better information to the fiduciaries, says Keith R. McMurdy, a partner at the New York office of Fox Rothschild LLP.
With these new regulations, plan sponsors will need to benchmark plans and "really experienced providers will do that to their advantage," says Fred Reish, a partner in the Los Angeles law office of Drinker Biddle. They will find plans where an adviser has charged too much or where a plan has grown and an inexperienced provider has not cut back accordingly, he explains. That "will drive down pricing and [give a] competitive advantage to experienced advisers."
Yet, Larry Goldbrum, general counsel at Simsbury, Conn.-based The Spark Institute, says that this final rule will not be the starting point for a wave of consolidation. "This issue has been a subject of focus for four years now," he says. "Most service providers and advisers that are responsible have really taken steps to make their fees more transparent."
With the final rule now issued, Goldbrum adds, the industry knows what DOL is expecting and it is only an "important technical event for those of us who have to comply."
Industry groups say their clients will comply with the new rules. But even with the extended time, complying by July may be difficult, explains Brian Tate, vice president-banking of the Washington-based Financial Services Roundtable.
Plan sponsors believe the fees are important to disclose. According Deloitte's Annual 401(k) benchmarking survey, conducted in summer 2011, 79% of plan sponsors believe it is quite important or very important to improve understanding of (and potentially reducing) plan fees.
In the end, the way you view the new regulations depends on from what side you see it, says BrightScope Chief Executive and Co-Founder Mike Alfred. For a provider, it puts a perspective on margins as they will find "more pressure to lower their fees because plan sponsors will understand how much they are paying." While for plan participants, they will pay a lower fee, "which is better for the sustainability of the retirement market."
Yet, the plan sponsors expressed little worry about if their fees are competitive. In the Deloitte survey, 83% of plan sponsors say their 401(k) plan fees are competitive and 75% agree or strongly agree that they already have no difficulty obtaining a clear understanding of plan and participant fees.
In the long run, Alfred says there is no question in his mind that fees will go down. "When buyers and sellers understand the overlying value of any instrument . . . the market becomes more competitive, spreads [move] tighter and cost comes down," he says. "The industry wants you to think its going to be so confusing but there's no way that's true over the long term."
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