The new Department of Labor 401(k) fee disclosure rules that go into effect on April 1 will radically shake up the industry, according to Tom Gonnella, senior vice president of corporate development at Lincoln Trust, who gave six predictions for the defined contribution industry in 2102.

“The sound of all those envelopes being torn open—and the collective gasps, screams and confusion likely to ensue, as plan sponsors and participants see the true cost of their retirement investments spelled out in black-and-white for the first time—will echo throughout the financial services industry,” Gonnella said.

The biggest screamers? Highly compensated C-suite executives with six-figure 401(k) balances, Gonella said. “This C-suite sticker shock will cause a wave of 401(k) reevaluations by companies—looking at everything from changing plan administrators, to lowering investment expenses (a whopping 84% of a plan’s cost), to reallocating overall expenses across the plan structure,” Gonnella said.

Going a step farther, Gonella said, 401(k) fee disclosure is not the whole story. “The disclosure of investment costs actually incurred by participants is not required by the new DOL regulation,” he said. “The DOL only requires the disclosure of the expense rations and the amount per $1,000 that it would costs participants to be invested in the fund. Once sponsors and participants get a taste of disclosure they will want more—and regulators will be pressed to provide it.”

This intense focus on fees will also lead to a new brand of 401(k) consultant to work with sponsors, Gonnella added.

The forthcoming new fiduciary standard that the DOL is expected determine sometime in 2012 will force investment advisors and plan administrators to either embrace open architecture—or exit the DC business altogether, Gonella said.

He also believes that while target-date funds will continue to be popular, another, most customized version in the form of customized asset allocation models, will gain traction in 2012.

Lee Barney writes for Money Management Executive.


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