Rules for Retirement: Plan Fees Have Companies Scrambling to Comply

Despite the dizzying array of new fee rules that 401(k) plan administrators and companies providing services to those plans must implement this year, Debbie Hoover says her small manufacturing company is ready for them.

Hoover, director of human resources for Los Angeles-based industrial paint maker Ellis Paint, says that although she initially was overwhelmed by the new wave of regulations, her retirement plan administrator, Fidelity Investments, coached her on the changes and new responsibilities.

Ellis, with 150 employees, decided that Fidelity would do the detail work and would later explain it to its plan participants.

“I was concerned about how we were going to do this when the regulations first went through,” Hoover says about the double dose of rules governing fees charged to retirement plans like 401(k)s. The regulations, which were issued by the Labor Department in several phases, all must be implemented this year. “As a small company, having Fidelity handle it seemed to be the most efficient way to do this.”

The rules are the Labor Department’s two-step way of making sure that plan sponsors such as Ellis Paint know how much providers like record keepers, money managers and plan administrators are charging to service 401(k) plans. Another regulation, which was finalized in October 2010 but goes into effect this summer, requires plan sponsors to tell participants about these fees and how they affect their account balances.

Even though the first regulation

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has providers like Fidelity doing a lot of work, companies shoulder a lot of responsibilities too. Experts say larger plans are ready for the change, but many midsize and small companies are trying to establish deadlines for information and the actions they should to take once it’s assembled.

“The challenge for many plans is following the process,” says David Wray, president of the Plan Sponsor Council of America, formerly the Profit Sharing/401k Council of America. “That means going through and making sure [plan sponsors] can assemble all the information so it can be benchmarked.”

The requirements can be confusing, says Sam Henson, senior ERISA counsel for Lockton Retirement Services in Kansas City, Missouri. To help plan sponsors through the process, Lockton created a checklist to make sure plan sponsors are reaching the right service providers before deadlines for information hit.

“Lots of plan sponsors are scrambling to make sure they are doing this,” Henson says. “The intent of the rule is great. The [Department of Labor] wants to make sure plan sponsors are getting what they are paying for, but in order to get there, the DOL has put a tremendous burden on them.”

Plan sponsors should be contacting all service providers that charge the plan at least $1,000 or more annually. By May 1, plan sponsors had to figure out whether fees are reasonable, Henson says. If providers haven’t given the information by July 1, plan sponsors should issue a written request. If providers haven’t complied by Nov. 1, plan sponsors should notify the Labor Department.

Plan sponsors need the provider fee information so they can give participants data on fees. This regulation comes in two waves: the first requiring plan sponsors to give participants plan and investment information due Aug. 30, and the second delivering quarterly information on fees and services to participants’ individual accounts, due Nov. 14.

The key to the process is documentation, experts agree. It’s important the plan sponsor have a paper trail to show the Labor Department, Henson says.

“You’ve got to have a really detailed file to show you tried to comply with the rules to the best of your ability,” Henson says. “That’s the way the DOL does everything.”

The penalty for not complying is draconian, says Marcia Wagner, owner of Boston-based Wagner Law Group. If a provider doesn’t give the plan sponsor the necessary information, or if fees are found unreasonable, the plan sponsor must fire the provider.

Plan sponsors ignoring these outcomes could be sued by participants and the Labor Department as well as face a 15 percent excise tax and other penalties, she says.

“You don’t want to mess with this law,” Wagner says. “The Labor Department isn’t playing around with this.”

About the Author:

Patty Kujawa is a freelance writer based in Milwaukee. Reprinted from Workforce Management

Employers Eye Revamping Retirement Plans

Like many companies, Wise Alloys froze its defined benefit plan for union employees when the Great Recession hit.

Salaried employees didn’t have one, and the company’s benefits committee felt like it wasn’t doing enough to prepare workers for retirement with only a defined contribution plan.

“We wanted a product that looked like a defined benefit plan,” says Sandra Scarborough, plan administrator for the Muscle Shoals, Alabama-based aluminum can producer. “Our people are looking for a guaranteed monthly income” once they retire.

Last year, Wise decided to offer an investment option within its defined contribution plan called IncomeFlex, a guaranteed income product managed by Newark, New Jersey-based Prudential Financial Inc. IncomeFlex is a target-date fund that freezes the target-date fund schedule 10 years before retirement, activating a guaranteed income for participants.

When a participant is ready to retire, IncomeFlex guarantees a specific level of income over that person’s lifetime to hedge against stock market declines. If a participant leaves the company offering IncomeFlex, the participant can leave IncomeFlex assets if the plan sponsor allows it, or the participant can take the market value or roll the value into a Prudential Individual Retirement Account.

Scarborough says she doesn’t have an exact usage number but says participants have responded well to the new investment option.

“As a company, we felt we needed to do more, and this is a very popular option” for participants, Scarborough says.

With the continued descent of the number of defined benefit plans, employers are becoming more concerned about workers having enough money to sustain their retirement. Defined contribution plans, when first introduced, were supposed to be a supplement and not the main driver for retirement savings.

Now that these plans are in the front seat, employers are looking at guaranteed defined benefitlike investment options, mostly referred to as “retirement income solutions,” to help employees have more secured savings to tap throughout retirement.

“I don’t think we’re going back to defined benefit plans,” says Martha Tejera, an actuary and project leader for Tejera & Associates in Bainbridge Island, Washington. “We need to make defined contribution plans more efficient in providing participants reliable retirement income.”

It seems employers with defined contribution plans agree. In a February study by consulting firm Aon Hewitt, only 4 percent of the 500 employers surveyed said they were very confident their workers would retire with enough assets—a 26 percentage-point drop from the previous year.

Helping employees retire with enough money is a top priority for nearly half, or 44 percent, of employers responding to the survey, called 2012 Hot Topics in Retirement. Many employers are expanding savings choices, including offering in-plan retirement income options, similar to what Wise Alloys offered its participants.

Today, almost all participants take a lump-sum distribution at retirement. Many go out into the market and purchase annuities, which are insurance contracts that guarantee lifetime income. In-plan income options are a defined benefitlike feature allowing participants to put money in an annuity investment before retirement.

Currently, 16 percent of respondents offer an in-plan retirement income solution, and 22 percent of respondents said they plan to adopt this kind of investment vehicle in 2012, Aon Hewitt’s survey revealed.

“There seems to be a growing sense of urgency in offering these solutions,” says Pam Hess, director of research for the Lincolnshire, Illinois-based consulting firm.

Data from Prudential also shows an uptick in retirement income solutions being offered by plan sponsors. In 2011, 267 of Prudential’s clients had a retirement income solution in their 401(k) plan investment lineup. That is a 58 percent increase from 2009, when Prudential started offering IncomeFlex.

“Three years ago, most people didn’t know what we were talking about,” says Sri Reddy, Prudential’s senior vice president for institutional income. “Plan sponsors are

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Meanwhile, providers are finding different ways to offer retirement income solutions. In October, Hartford Financial Services Group introduced the Hartford Lifetime Income, which allows 401(k) plan participants to purchase retirement income shares; each share’s price is determined by participant age and interest rate value at the time of purchase and will provide a minimum of $10 of guaranteed monthly income per share for life. So 50 shares would mean $500 per month.

“People are wanting some kind of guaranteed income stream, but they want to keep it simple,” says Patricia Harris, Hartford’s actuary who designed the product. “It’s certainty and simplicity of design.”

For years, plan sponsors toyed with the idea of offering an in-plan solution but were hesitant because of fiduciary concerns, a long-term commitment with an investment company and other issues, Hess says.

But just as employees are realizing they need to be better savers for retirement, employers are becoming more aware that they need to provide some type of stability so workers can move out of the workforce at the right time, says Tejera.

“We are finally getting to the place where plan sponsors are saying we need defined contribution plans to do more to help us manage our workforce,” says Tejera, who recently wrote a brief for the Institutional Retirement Income Council on guaranteed income investments. “Employees don’t want to work past their productive lives, but if they can’t afford to retire, they are going to stay in their jobs.”

About the Author:

Patty Kujawa is a freelance writer based in Milwaukee. Reprinted from

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