The 408(b)(2) rules are getting a lot more industry attention, perhaps this is due to how much the industry has historically done to disguise fees, that it is going to be incredibly difficult to accurately show clients how to follow the money trail. Perhaps it is because this is the rule that makes Broker/Dealers and Insurance Company’s a little squirmy due to that little requirement where the service providers have to declare if their acting as a fiduciary or not. Whatever the reason is, the practical reality is that some difficult discussions (and maybe decisions) will happen between service providers and clients. But this is a difficult business, and I believe that ultimately most of the good practitioners will get through it with most of their client relationships intact.
However, participant disclosure……that’s a whole other scenario, and it’s happening first!!!! This article, by David McCann from CFO Magazine does a good job of thousand footing the situation.
I, and most practitioners I know believe that the majority of participants have no idea what the retirement plan costs are and many think that they are getting a free benefit, that they pay nothing for their 401(k). This is a systemic issue. Most 401(k) mouse traps in the market, historically, have been designed to disguise fees from the participants. The group annuities (and Collective Funds) unitize the investments and thus are embedding fees into the unit prices. Many mutual fund platforms are often registered rep distributed, and their compensation is in the expense ratio, but also built into share prices, not to mention implicit revenue sharing arrangements. Even environments where the fees are deducted as line item expenses from participant accounts will often not be explicitly disclosed. For the participant to discover these charges, they will have to search for these deductions online in the form of a customized transaction report.
As a result, the new participant disclosure rules will 100% create a HUGE amount of phone calls, complaints to everyone and anyone associated with creating and managing their plan. Frankly, I think, it will cause a large quantity of plans, big and small, to search out new providers. For proactive practitioners, this is absolutely an opportunity. Advisors who aren’t in front of this are going to have to back pedal as the business owners and CFOs start getting questioned by staff. As Mr. McCann says in his article……..consider yourself warned!