Nearly eight months after taking effect, the federal government's 401(k)
fee-disclosure mandate, designed to help workers and their employers better
understand the costs of their retirement plans, appears to have lost something
in the translation.
The new federal rules call for companies that administer 401(k) plans to show
workers and their employers exactly what fees are taken from their investment
returns to pay for the operation of the programs _ fees that can drain thousands
of dollars from their accounts through the years.
But some financial advisers say many have ignored or given up already on the new
disclosures, which are to be sent out annually and, to some extent, included in
quarterly statements. Although some disclosures present the new fee information
clearly, others are lengthy, confusing and full of jargon, they say _ a big
turnoff for the average employee trying to make sense of retirement savings.
The rules have already generated dozens of complaints to federal regulators
about alleged violations.
"Most people don't read those kinds of things anyway," said Cary Carbonaro, a
certified financial planner in Clermont, Fla., with United Capital Financial
Advisers. "And if there's anything confusing in it, they'll just toss it in a
pile to go in the trash can."
The rules' lackluster effects so far are frustrating personal-finance experts
who had hoped they would lead to greater transparency and, in doing so, energize
workers' retirement planning. Instead, the disclosures have been problematic for
investors while creating more paperwork for employers and plan-management
companies, said Jason Chepenik, a certified financial planner and managing
partner of Orlando, Fla.-based Chepenik Financial, which manages 401(k) plans.
"We handle plans for more than 25,000 (employee) participants across the
country, and we cannot find one person that has asked a question about this fee
disclosure," he said. "It's been like a big waste of time so far."
The Labor Department rules require 401(k) companies to disclose their fees for
plan-management services such as administration, record-keeping and accounting;
until this past August, such costs were "hidden" in the expenses charged by each
investment fund in a 401(k) plan. They also require companies to state in dollar
terms each fund's expense ratio, so employee-investors can see how much of their
investment returns are being surrendered to cover operating expenses.
The agency confirmed this month that regulators are looking into nearly 50
complaints nationwide from employers and financial advisers who have reported
violations of the disclosure rules. It said officials are trying to determine
whether the financial-services companies involved violated the requirements
willfully or by accident.
Citing the agency's confidentiality policy, the agency would not provide details
of the complaints. It noted that the number filed so far is very small, given
that there are nearly 500,000 employer-sponsored 401(k) and 403(b) savings plans
nationwide.
"The department is reviewing the new fee disclosures as part of the normal
investigative and auditing process," an agency spokesman said in a prepared
statement. "Our primary focus is to work with employers and service providers to
encourage and bring about voluntary compliance with the new requirements."
If investors think a plan administrator has violated the new rules, they can
file a complaint with the U.S. Employee Benefits Security Administration by
calling 866-444-3272.
It's no surprise the Labor Department is taking a cautious approach to
enforcement of the fee-disclosure rules, given their newness, said Bryant Kirk,
chief operating officer of the Newport Group, a Heathrow, Fla.-based company
that manages 401(k) plans for small and midsized businesses.
"There will be a self-compliance period, when people are left to correct their
own mistakes," he said. "But before long, the Department of Labor will start
auditing these things, issuing opinions and interacting with people to create
more regulatory enforcement."
Despite the rough edges on the new rule's rollout, it has generated some
benefits for employers and plan administrators that, in turn, indirectly benefit
employee-investors, financial experts said.
"I'm sure some of these companies made it as confusing as possible," said Joe
Nunziata, chairman of FBC Mortgage LLC, an Orlando, Fla.-based mortgage lender
that offers its employees a 401(k) plan. "But our company, Nationwide, has been
pretty good; they've disclosed the information properly and made the fees very
transparent."
Also, with plans' management fees now separated from the fees charged by the
individual investment funds inside the plans, an employer can now accurately
compare the cost of its plan with others, creating a more-competitive market for
plan services.
"In some cases, it's almost like a pricing war out there," said Al Baker, a
certified financial planner at Resource Group in Winter Park, Fla. "Fees are
getting lower at a lot of the 401(k) plan companies, and there are a lot of
financial advisers who are scrambling to find out who the winners are going to
be."
Some management companies raised their fees because of the new rules, citing
added paperwork, but the overall effect has been positive, said Tim Caldwell, a
consultant for the Altamonte Springs, Fla., office of Pension Investors Corp.,
which manages employer-sponsored plans.
"The real abuses in fees came from some of the deals that plans had with
investment advisers whose firms were receiving money back in the form of
marketing fees and other payments," Caldwell said. "Those fees were never broken
out, but were hidden inside the plan.
"But now they have to be shown so people will understand it," he added, "and
that has caused many companies to get rid of those kinds of arrangements _
because they don't want to disclose it."
