Meaningful Changes to 401(k) Plans

Regulations 408(b)2 and 404(a)5 mark the most dramatic change to 401(k) retirement plans in many years.  Arguably, these regulations will change the very nature in which service providers operate, compete for business and are held accountable for their actions.  These regulations refer to disclosure requirements and are imposed on all service providers, such as investment advisors, broker dealers, attorneys, consultants, third party administrators (TPA), and record keepers.  To briefly summarize:

408(b)2:  Is the plan-level disclosure in which service providers discuss (1) fees and expenses incurred by the plan, (2) acknowledgement of fiduciary status, and (3) potential conflicts of interest.  Upon review of the disclosures from service providers, the plan sponsor should have a good estimation of the “reasonableness” of the expenses associated with operating the retirement plan in relation to the services being provided.  

404(a)5:  Is the participant-level disclosure.  This disclosure helps the participant understand how much of the plan-level expenses were attributable to their investment account.  Fees include mutual fund expense ratios, custodian fees, TPA fees, and Investment Advisory fees.  It is noteworthy to mention that the participant disclosures only include fees that not paid by the plan sponsor.  For example, Investment Advisor fees may be paid by the sponsoring employer. In this case, no Investment Advisor fees are reported to the participant.

Prior to these regulations, the term “fiduciary” was loosely used.  Also, fees and expenses were not fully disclosed.  With no standardized process for determining the “reasonableness” of a retirement plan’s offering, it’s not surprising that plan sponsors were not fully informed.  In my opinion, these regulations represent a huge victory for 401(k) plans.  Finally, plan sponsors and participants will be able to better understand whose interests are being served (referring to fiduciary status and conflict of interest disclosures) and a better understanding of the cost associated with saving for retirement. 

I’m pleased to share that Parsec has been in agreement and in compliance with these rules well before the government imposed deadline of July 1, 2012.  In our view, these are welcome changes to the retirement plan industry and perhaps a little overdue.  We believe in being transparent with our clients because this fosters stronger relationships and better overall satisfaction.

Neal Nolan, CFP®

Financial Advisor

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