Since the financial crisis and Great Recession, 401(k) plans have undergone dramatic shifts. To foster diversification and greater participation, 51% of participants in Fidelity Investments' 401(k) plans are in automatically enrolled plans, up from 16% five years ago, and 73% of the plans use target-date funds as the default, up from 11% in 2006. In the past year, 64% of sponsors changed their investment lineup-up dramatically from 20% in 2008.
Plans are headed for another fundamental shift in 2012. In April, all 401(k) providers will begin disclosing fees to sponsors and investors-putting fees and services under a white-hot spotlight. That's the belief of retirement plan consultancy Verisight.
Since nearly half, $4.5 trillion, of the total $11 trillion mutual fund industry is invested in 401(k)s and other defined contribution plans, Money Management Executive recently spoke with Verisight CEO Greg Tschider and Senior Vice President Robert Stebbins on the ramifications of the new disclosure.
MME: As the industry heads toward full fee disclosure in 401(k) plans, have there been any changes to fees in the past year?
Gregory W. Tschider: The middle market has historically been underserved. We are just now seeing services that have been offered for the upper part of the market migrating down.
The Verisight model was created as a mid-market solution, and prices plans not based on assets under management but, rather, on a per-participant basis. This has already been occurring in the larger end of the market, and is just now becoming more prevalent among the middle market.
MME: Are there other things besides a per-participant fee structure that are migrating down to the middle-market?
Tschider: Investment choice, which goes hand-in-hand with the fee structure and plan design. Also, fiduciary and advisory relationships in the middle market are starting to resemble what has occurred in the upper market-where the pricing for financial advisers is beginning to be level fee-based, as opposed to asset-based.
MME: How big of a task will full fee disclosure in 401(k) plans be?
Robert Stebbins: There are actually two fee disclosure regulations that are going to become effective next year.
The first is a plan sponsor, or fiduciary level, fee disclosure, where service providers are going to have to push out information to the fiduciaries about the fees that are associated with their retirement plan-in a very specific format. This becomes effective April 1, 2012. The second is a participant level fee disclosure. This is due by the end of May next year.
The industry is concerned about being able to comply with these two new disclosure rules, which is why the effective dates have been pushed back several times. We certainly feel very comfortable about complying with the new fee disclosure rules since we have already been providing this information to our clients for a number of years now. As Greg mentioned, we have a visible fee-to-service model, so our fees have always been fairly understandable to the plan sponsor and readily available to them.
MME: Has this full fee disclosure been an important factor for your clients?
Stebbins: The industry, overall, has become more interested in fee disclosure because of the pending regulations. But for our clients, it is a fairly brief conversation because we have been providing this information all along and they are already comfortable with fee disclosure.
MME: Do you expect more animated negotiations between plan sponsors and vendors over fees?
Stebbins: Certainly. The next step in all of this will be widespread conversations about what the fees should be. We are probably going to see both the rates and model for the fee structure being negotiated.
You have to remember that the purchasers in this industry are the fiduciaries, and they are spending other peoples' money. This requires a vetting that goes beyond what you would do for your own self. As the fees start to be clearly displayed, these fiduciaries are going to be charged even more heavily with determining whether or not those fees are appropriate for their particular retirement plan.
They're also likely to pay closer scrutiny to the services they are receiving.
MME: One of the concerns over 401(k) fee disclosure is that it might prompt investors to focus inordinately on fees and bypass appropriate, actively managed funds. Is this a concern of your clients?
Stebbins: Our clients' participants have proven they are better able to digest this information than we give them credit for.
It really is a question of whether you want to provide them with information on the cost of their purchase or not. In virtually every other purchasing decision we make in our lives, we know the cost. I think it is just a matter of being equitable and making investors feel more comfortable with their decisions.
As with all purchases, pricing is often just one of many components of a consumer's purchasing decision.
Tschider: Fee disclosure will enable participants to make better decisions. They'll be able to ask, "What is the value of that active fund versus the index fund, and is that value worth the additional price?"
MME: Do you think that the Department of Labor's final rules on investment advice in 401(k) plans will lead to more advice being offered?
Stebbins: I did not see any major changes in the final rules, although they are likely to create a wider swath of sponsors comfortable offering advice. The real problem is that only a very small percentage of participants take advantage of advice. The advice itself has to improve-to speak to higher savings rates, income replacement and retirement age.
Those are three key issues that are more internal to the person and may require some sacrifices on their part.
