Henry Yoshida recently published a feature article in ASPPA's November 2011 Advisor Update Newsletter.

Full Article: http://www.asppa.org/Document-Vault/PDFs/advisorupdate/Nov2011/FeatureYoshida.aspx

Fee Disclosure Legislation: Are You and Your Clients Ready?
By: Henry Yoshida

Recent legislation around disclosing fees to plan sponsors and participants, referred to as 408(b)(2) and 404(a)-5 respectively, has many advisors planning how to best prepare clients for the impending revelation.

The legislation is basically a breakdown of the fee distribution in a plan. Plan providers will soon have to disclose, among other things, a description of the services provided and all direct and indirect compensation the covered service provider expects to receive. This disclosure must be provided at the time of contract signing and with any plan changes going forward. For plan participants, plan providers will be required to disclose annually, among other things, plan-level administrative expenses and transaction-level individual expenses charged directly to participant accounts.

Although most clients, both plan sponsors and participants, understand there should be a reasonable fee charged for administering and servicing 401(k) plans, some are completely unaware of how much in fees they’re actually paying, what percentage of their investment is fee-related, and to whom those fees are going.

The new legislation will change all of that, setting standards for reporting that will even the playing field and present much needed transparency in an industry clouded with a less-than-ideal reputation for secrecy.

Breaking the News
Plan providers, and advisors who act as the liaison between them and the plan sponsors and participants, may be wondering how to best approach the latest requirements. The Department of Labor will give plan providers specific guidelines on what the fee disclosures must include. Based on those guidelines, each provider will be responsible for developing its own template, updating its internal systems to accommodate the template, and modifying its contracts and statements to show plan sponsors and participants exactly how much their 401(k) plans are costing them. It will be up to the investment advisor to help plan sponsors and participants understand these statements and what it means for their retirement plans.

While we’re not plan providers, as a 401(k) advisory firm, the Maresh Yoshida Group must also follow the strict government disclosure guidelines. Actually, we’ve been disclosing fees to our clients for nearly two years in anticipation of this legislation.

We benchmark ourselves regularly and believe our clients have the right to know how much they’re paying for their plans and for our services. Because we’re confident our services justify our fees and we know our fees are in line with the industry, we aren’t afraid to disclose them to our clients.

For the plan, we include the general mechanics of revenue disclosures and credits through a series of educational seminars and general education meetings with the plan sponsor. We provide a third-party benchmarking report from trusted resources, such as Fiduciary Benchmarks and Judy Diamond.

These reports not only detail the various revenue-sharing disclosures on a fund-by-fund basis, but also illustrate how the specific plan and related fees compare to other similar plans. If the plan is out of range, we can change investments, negotiate with plan providers to lower overall administrative fees, and ensure the company is using all the services offered by the plan provider.

The kind of transparency this legislation aims to enforce shifts the focus of a plan sponsor committee away from investment returns and performance, and correctly positions the conversation toward the overall health of the plan, or more important, to the retirement readiness of the participants in a 401(k) plan. As the plan sponsor committee becomes more comfortable with the fee mechanics of the 401(k) plan, the advisory firm can work with the committee to begin incorporating a component of fee disclosure into the general education meeting.

Participants will see yearly fee allocations on their statements and plan sponsors will be presented with the fee breakdown when they sign the initial plan contract. Of course, any changes to the plan will require additional disclosures. In coordination with the participant fee disclosures, plan sponsors should be prepared to demonstrate to their employees how they’re addressing plan fees and what they’re doing to make sure the fees are reasonable.

Benchmarking Is Key
The impact of the new legislation will be interesting to witness over the coming years. I believe it will be positive: alleviating the risk for lawsuits due to excess fees for service; driving down fees in order for providers to remain competitive; sifting out inexperienced advisors who are incapable of properly explaining fee disclosures to clients or bringing clients more in line with benchmarking data; and exposing conflicts of interest between investment firms and the plan providers they endorse because of lucrative (and often guarded) partnerships.

On the other hand, there’s a risk that once companies see what they’ve been paying, some may be angered and try to lower costs by moving their plan to a lower-cost provider. Participants may try to cash in their 401(k)s for a seemingly less expensive retirement alternative. Although the fees have always been there, it may come as a surprise to those who never questioned what a plan actually costs or how much of their contribution was going to pay for that plan.

To combat these possible knee-jerk reactions, advisors will have to ensure that the services they provide are offered at a cost that is justified by the market. Benchmarking is the most objective and effective means to validate this and advisors should use benchmarking to check themselves and their clients’ plans against the rest of the market.

Advisors are burdened to prove that good services aren’t free and every plan has a cost. The key will be to move clients away from the question of “how much am I paying” to “what am I getting for this fee and is it comparable with other similar plans?”

I believe education is critical. Not only should 401(k)-focused advisory firms go to great lengths to keep clients apprised of the latest 401(k) legislation, but they should also ensure their clients are informed and comfortable with impending changes as they relate to their specific plans.

The feedback from our clients, both plan sponsors and participants, has so far been nothing but positive. Clients appreciate an honest presentation on the intricacies of a 401(k) plan and how fees are paid. We have found that a proactive and thoughtful approach has actually strengthened our relationship with our clients. I think this legislation could go a long way in helping our industry rebuild the trust and confidence it once had and giving clients peace of mind.

Henry Yoshida is a partner with the Maresh Yoshida 401(k) Group in Austin, Texas.

Full Article: http://www.asppa.org/Document-Vault/PDFs/advisorupdate/Nov2011/FeatureYoshida.aspx

November 2011 Advisor Update: http://www.asppa.org/Document-Vault/PDFs/advisorupdate/Nov2011.aspx