When the U.S. Department of Labor speaks, we should listen, whether we work with qualified retirement plans or not. The DOL made several announcements in October that are going to be significant game changers for the financial services industry.

In our November column ("The New Rules of the Road"), we identified four proposed regulatory changes that will either subject more advisors to a fiduciary standard of care or severely disrupt a traditional brokerage business model: the Dodd-Frank Act; the SEC's Proposed Rule 12b-2; the DOL's 408(b)(2) regulations; and the DOL's and IRS' Proposed Investment Advice Regulations. In this column we are going to examine another new regulation-ERISA Section 404(a)(5).

On Oct. 14, 2010, the DOL released final regulations on the disclosures that must be made to every participant in a self-directed retirement plan, such as a 401(k). Regulation 404(a)(5) goes into effect November 2011 and requires plan sponsors to give participants:

* Quarterly statements that include the actual expenses deducted from each participant's account, expressed in dollars and cents;

* Fees and expenses and all possible charges associated with each designated investment option under their plan; and

* Access to supplemental investment information, such as details of how expenses are calculated and specific terms of insurance contracts.

The disclosures must use uniform methods to calculate investment- related expenses. Investment return information must be presented in a format that makes it easy for a participant to compare investment options.



You might be thinking, "So what; just more regulatory red tape." If so, consider the following: Come November 2011, 72 million plan participants are going to be told something that they never knew before-how much they pay each quarter for the management of their 401(k) plan. Most participants, by the way, believe they pay nothing.

Within a year, investment fees, recordkeeping and administrative fees will no longer be hidden in the back pages of a lengthy legal document or in some fine print. Instead, fees and expenses will be published every quarter in the one document most participants actually open and read-their quarterly statements. Furthermore, the amount will not be expressed just in basis points (which the vast majority of participants cannot convert), but in dollars and cents.

As participants begin to compare these quarterly fees and expenses to their other household expenses, they're going to question the value of the services being provided; they're going to go to you, their trusted advisor, for answers to their questions:

* What am I paying for?

* Am I paying too much?

* How do these investment options compare to others your firm offers?

* Is there a better way to save for retirement?

For example, consider a participant with a large 401(k) account balance. It is likely the participant is going to realize, probably for the first time, that his or her expenses are considerably more than those of a participant with a smaller account balance, even though both participants are receiving essentially the same services. Viewed this way, participants who pay the highest expenses (i.e., those with the highest balances) are likely to seek alternatives outside of their current plan.

There also will be a spillover effect on all structured investment products, not just those sold through retirement plans. The demand for lower fees by 72 million participants and their families, and 483,000 plan sponsors, will awaken a sleeping giant that places similar disclosures on virtually every investment and financial product. The effect of the new regulation will be to reach into other product areas because client behavior is altered for all. It may be impossible to assess the economic impact of the spillover effect this early in the game, but it will certainly reduce fees and expenses across the board.



Up to this point we have talked about how 404(a)(5) will impact all financial planners and investment advisors but, now let's look at the impact the regulations will have on retirement advisors. The challenges present particular problems for advisors who work with 401(k) plans, depending on the arrangement and compensation method. Once the advisor's costs are exposed and examined, the critical question will be whether the advisor's services are both essential and economical.

When the plan sponsor is aware and agreeable to the advisor's compensation, there is no threat. Advisors who provide ongoing support (the fiduciary decision-making process) with demonstrable results are not likely to be challenged, even if their compensation is a surprise to the plan sponsor. On the other hand, advisors who receive indirect compensation, but are not providing commensurate support to either the plan sponsor or the participants, will likely be the first casualties of the new regulations.



For those financial planners and investment advisors who work with 401(k) plans, there are six steps you should take to prepare for the new disclosures:

* Make sure your clients understand what is provided and why. Prepare a simple and clear summary of all the services being provided in language familiar to the average plan sponsor. Reviewing this summary reinforces what the plan sponsor is receiving.

* Learn what lower-cost alternatives are available without changing vendors. When you review the services currently offered, invite the plan sponsor to consider other vendors and investment choices that may be higher or lower in cost. This enables the plan sponsor to put service in perspective.

* Get participant buy-in. Involve participants in the decision of what to keep and what to let go. Use a simple low-cost survey to get this involvement and reinforce it by sharing the results with participants and taking any necessary action.

* Inform participants of notices ahead of time. Set participants' expectations about receiving new disclosures in standalone notices or in conjunction with their periodic statements.

* Explain what decisions participants should make with disclosures. The first time a new disclosure is sent, each participant should also receive a decision guide for what to do about what they have learned. This will help the participant to decide if action is warranted.

* Prepare to answer participants' complaints. Options include a hot- line to call with concerns, staff specifically trained on these matters and a website option to answer frequently asked questions and post additional ones.

As with any major disruption in the financial services industry, new opportunities will be created, and ERISA 404(a)(5) is no exception. Low-cost service providers will certainly have a leg up on the competition, but all service providers will be under increased pressure to demonstrate their value. Section 404(a)(5) is yet another illustration of how regulatory changes are shifting the industry toward a fiduciary standard, whether it is formally acknowledged or not.


Donald B. Trone, RF, is CEO and founder of Strategic Ethos, and is the founder and executive director of the Foundation for Fiduciary Studies. Louis S. Harvey, RF, is CEO and founder of DALBAR, and president of the Foundation for Fiduciary Studies. DALBAR is the registrar for the new fiduciary designation, RF (Registered Fiduciary).

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