This PlanSponsor article quotes Genny Sedgwick discussing how fee disclosure regulations have affected changes in the way businesses approach fee transparency.

Here is an excerpt:

Even for companies that had full transparency before fee disclosure regulations, 408(b)(2) and 404(a)(5) still prompted change in their businesses.

Genny Sedgwick, principal at Milliman, said during a panel at the 2013 PLANSPONSOR National Conference that although her company’s entire book of business already had fee transparency, fee disclosure regulations spurred more education initiatives. In educating plan sponsor committees about fee disclosure, the outcome included investment changes. “There were a lot of changes in the fund menu,” Sedgwick said.

More index funds were also added to plan menus, she added, anticipating that participants would ask for lower-cost investments following fee disclosure.

Overall, Sedgwick said Milliman welcomed fee disclosure because it leveled the playing field by requiring more transparency across the industry.

In this blog, Genny explains the relationship between defined contribution plan fees and investment expenses. She also gives perspective on the concept of revenue sharing.

For more perspective from Genny, click here.

This blog summarizes a presentation given by Genny Sedgwick at the Mid-Sized Retirement & Healthcare Plan Management Conference in San Francisco.

We’ve talked a lot about fees in defined contribution (DC) retirement plans lately: the disclosure regulations effective in 2012 have caused quite a stir, and for good reason. For plan fiduciaries, ensuring that retirement plan fees are reasonable and fair is a fiduciary duty, and understanding plan fees can have a significant impact on retirement savings for participants.

For example, if a participant’s retirement investments or account is overpriced by one-quarter of 1% (25 basis points), and the participant has $5,250 in total contributions annually for 40 years, then that participant will have overpaid $40,056 in fees!

But simply knowing the base amount or formula stated by the recordkeeper is often not sufficient to truly understand the impact of fees in a retirement plan. It’s also essential for plan sponsors to consider the different types of fees that occur in retirement plans: plan-level service fees, participant-level service fees, and investment fees. These fees interplay in ways that can have dramatically differing effects from participant to participant.

In order to understand retirement plan fees, it’s important to understand investment expenses and the concept of revenue sharing. Each investment option has an expense ratio, which may contain two major fee components: an investment management fee that varies based on the attributes of the fund or its manager, and a shareholder service fee, which is often paid indirectly to the plan’s service provider(s) in a process called revenue sharing. Expense ratios can vary substantially from fund to fund within a plan, so participants pay different amounts of investment expenses based on their allocations among those funds. Revenue sharing further complicates the matter because not all investment options have a shareholder service component, and those that do have different rates and policies.

Revenue sharing can be normalized among participant accounts in the plan through a process called fee leveling, wherein revenue sharing is allocated back to participant accounts on a per capita or pro rata basis, or back to the participants who held the funds that generated the revenue sharing. However, not all recordkeepers can administer all of these options.

Another issue to consider is who should pay the plan fees that exceed the amount of revenue sharing generated by the plan. Some employers choose to pay these fees, while some assess them to participant accounts, in which case they must decide whether to allocate those “hard” costs pro rata or per capita. Pro rata cost allocations protect smaller account balances, while per capita allocations protect larger account balances.

What’s right for your plan? As the plan sponsor, it’s your choice, but given the implications for fiduciaries and the impact on the retirement readiness of participants, it’s important to understand the options, consider what’s best for your plan, and document your decision.

Certain plan sponsors and administrators are permitted to use electronic media to furnish information about the plan’s fees to participants. The Department of Labor has issued guidance on such communication. This Client Action Bulletin digs into the details.

The Employee Benefits Security Administration (EBSA) of the U.S. Department of Labor (DOL) issued a final rule on July 13 that further extends the applicability dates of the interim final rule on fiduciary-level fee disclosures and the final rule on participant-level fee disclosures. Both of these regulations were published in 2010, but on June 1, EBSA published a proposal to extend the compliance dates to give employers and other affected entities more time to comply with the new requirements.

The fiduciary-level fee disclosure requirements apply to service providers of ERISA-covered defined benefit (DB) or defined contribution (DC) retirement plans; the participant-level disclosures apply to ERISA-covered 401(k) and other individual account plans that give participants the right to direct their investments.

Under the newly released final rule, the effective dates are:

Other disclosures, such as quarterly statements of fees/expenses actually deducted from participants’ accounts, must be provided to plan participants by August 14, 2012, which is the 45th day after the end of the second quarter (April-June) in which the initial disclosure was required.

EBSA intends to publish a final fiduciary-level fee disclosure regulation “before the end of the year” in an effort to serve the “best interest of responsible plan fiduciaries, plan administrators, and plan participants and beneficiaries.” The agency also is expected to issue updated guidance on the use of electronic media to provide participant-level disclosures.

EBSA’s new final rule is available here.

The Department of Labor’s Employee Benefits Security Administration (EBSA) on May 31 issued a notice proposing to extend and align the applicability dates for both the interim final rule on fiduciary-level fee disclosure (ERISA Section 408(b)(2)) and the final rule for participant-level fee disclosure.

Read more…

The New York Times looks at the sometimes opaque world of 401(k) fees—and how new rules may contribute to a more transparent dynamic in the future. Here is an excerpt:

How, you may ask, can an employer set up a 401(k) plan for its workers and not know the cost? Employers may know the overall expense, but untangling the specifics is where the exercise gets murky because many 401(k) providers “bundle” their services — for record-keeping, investment management and custodial services, among other things. (Some providers, including Putnam Investments, already break out this information.)

“I’ve seen small companies, and I’ve seen very large companies that have hundreds of millions of dollars in the plan who do not understand what they are paying,” said Jeff Marzinsky. a principal with Milliman, a consulting firm.

Confusing matters further, many 401(k) service providers may also engage in revenue sharing. In that case, a mutual fund, typically one whose investments are actively managed, pays a 401(k) provider to handle some of the administrative duties (like record-keeping) associated with being in the plan. But the arrangements are often so complicated that it’s not always easy for employers to determine if investors are getting a prudent deal, even though that’s their responsibility.

For more on revenue sharing, see Jeff Marzinsky’s white paper from 2007.