Hello new 401(k) notices!
As if the new disclosures required under health care reform weren’t enough to juggle this summer, you need to wrap your head around sharing new data to your 401(k) participants. Yes, data about the fees they pay.
You may remember our article last summer suggesting you gear up for a January 1, 2012, implementation. Well, the principles still apply, and in February the final regulations were released. This is complicated stuff. Luckily, Business Legal Resources has done a lot of the legwork for you
Before you start strategizing how you’re going to take your summer vacation in the midst of all this change, let’s start with the basics:
On mandated timing
- By July 1, as a plan sponsor, you’ll have the raw data you need from your investment partner.
- By Aug. 30, you’ll need to issue an initial round of disclosures to all participants, assuming you have a plan year that starts January 1. These will highlight plan facts as well as investment fees.
- By Nov. 14, you’ll need to issue your first quarterly disclosure of fees deducted from an individual’s account July through September, again, assuming you have a January 1 plan year.
On delivery format
- To showcase the new investment fee information — annually and quarterly — the DOL has provided model notices.
- Electronic delivery is possible, assuming you meet the same requirements you’ve always met. Talk to your legal team about how similar these are to other legally-mandated notices.
Employees ought to care
You’ve always promoted the 401(k) as the best deal in town, as you should. The match and tax savings should continue to be the headline of this story. Now you also have to explain that your hard work (and economies of scale) mean employees are getting a good deal on fees—but the fees are still there. Here’s the Department of Labor’s example:
You are a plan participant with 35 years until retirement and a current 401(k) account balance of $25,000. If investment returns in your account average 7 percent, and fees and expenses reduce your returns by .50 (½) percent, your account balance will grow to $227,000 by retirement. However, if fees and expenses average 1.50 (1½) percent, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.
So that’s a pretty scary example, right? Examples work. But to mimic the effect for employees, take a different tack. Show them the differences between funds — especially if they are that stark. And you might want to layer in the investment returns for each of the fees. (It might be that the low-fee fund has modest returns over a 10-year period, as opposed to higher-than-benchmark returns in that high-fee fund over the same 10-year period.)
Even still, some industry analysts aren’t convinced participants will actually read the statements. But a MintLife commentator makes a great point: the transparency requirements have caused the industry to pre-empt the regulations with new, lower cost options. Time will tell.
Nail your key messages
The trick here is to spend time up front on how you’d like to tell this story. Build out a key messages document that:
- Focuses on the whole story — company match, tax deferral, retirement support along with fees — and how your fees compare to what’s available to an individual.
- References other retirement tools available to employees — especially if you have tools (or advisors) who can show how fees fit with typical investment returns.
- Takes into account health care messages that may be introduced at the same time.
Once you set your strategy, it will be much simpler to decide how to pace your messages leading up to the initial announcement through the summer enrollment season.