What lessons can 457 Plan Administrators learn from attempts to increase fee transparency?

In 2012, the U.S. Department of Labor (DOL) implemented new fee disclosure rules for 401(k) plans under the Employee Retirement Income Security Act (ERISA). These rules were designed to enhance transparency and help plan participants and sponsors understand the costs associated with their retirement plans. Key details:

Plan Sponsor Disclosure Requirements (408(b)(2) Regulation)

Service Provider Disclosure: Service providers (e.g., investment managers, recordkeepers, and advisors) must disclose detailed information about the fees and services they provide to plan sponsors. This includes:

1. Direct Compensation: Fees directly charged to the plan.
2. Indirect Compensation: Fees from third parties (e.g., revenue sharing).
3. Compensation Among Related Parties: Payments among related entities.
4. Compensation for Termination: Any fees charged upon termination of the service agreement.

Fiduciary Status:

Service providers must disclose whether they are acting as a fiduciary to the plan.

Participant Disclosure Requirements (404(a)(5) Regulation)

• Annual Disclosure: Plan administrators must provide an annual disclosure to participants, which includes general plan information, administrative expenses, and individual expenses.
• Quarterly Statements: Participants must receive quarterly statements showing the actual dollar amount of fees deducted from their accounts.
• Investment-Related Information: Includes details about each available investment option, such as performance data and fees.

Impact of Fee Disclosure Rules

• Increased Transparency: The disclosures aim to make fee structures clearer, helping plan sponsors and participants understand the costs associated with their 401(k) plans.
• Enhanced Decision-Making: With better information, participants can make more informed decisions about their investments, and plan sponsors can negotiate better service arrangements.
• Competitive Pressure: Greater transparency has encouraged competition among service providers, potentially leading to lower fees.

Importance of Fee Transparency

• Impact on Retirement Savings: High fees can significantly reduce retirement savings over time. For example, a seemingly small difference in fees (e.g., 1% vs. 0.5% annual fee) can lead to a substantial difference in the account balance over several decades.
• Informed Choices: Clear disclosure helps participants compare investment options and understand the trade-offs between cost and potential return.

The 2012 fee disclosure rules marked a significant step in promoting transparency and helping both employers and employees manage and optimize their retirement savings.

You Can't Manage What You Can't Measure, Peter Drucker

What can 457 Plan Administrators implement?

Voluntary Compliance for public sector 457 plans - an option for some

Public Sector 457(b) plans may voluntarily comply with certain best practices regarding fee transparency and participant communication, but this is by no means mandated by federal law. The decision to adopt such practices is discretionary.

Greater Transparency is possible

4 actions to consider:

• Fiduciary Status: Confirm who is a fiduciary, who is acting as a fiduciary, and how is this monitored.
• Voluntary Disclosure: Providing participants with information about plan fees and expenses, even if not required by law.
• Participant Education: Offering resources and tools to help participants understand the costs associated with their investments.
• Plan Audits: Conduct regular reviews of plan fees and services to ensure they are reasonable and competitive. Benchmarking is an easy way to gain plan-level fee transparency- you have to know your current fees to benchmark which for some will be an eye-opening first step.

Closing thoughts

As awareness of the impact of fees on 457 public sector voluntary retirement savings grows, there is increasing pressure to enhance transparency and participant communication. Solutions outside of ERISA 408(b)2 and 404(a) for non-ERISA plans in the public sector are available and fortunately are often superior when properly executed.

About Creative Planning Public Sector Retirement Advisory Services:

My focus along with the resource deep Public Sector Retirement Advisory Team at Creative Planning is to improve 457 and 401(a) plans. We are driven by the impact and by the people who have dedicated careers to helping their communities, special districts, and agencies.

[email protected] 213-314-3624, 415-367-5298