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Why 408(b)(2) is a flop for the 401(k) business and how RIAs can turn it around

The disclosure requirement sat around so long that workarounds got developed and employers got comfortable in the boiling water

Wednesday, April 10, 2013 – 5:23 PM by Guest Columnist Scott Pritchard
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Scott Pritchard: Wall Street lawyers had plenty of time between 2007 and last July to create slight-of-hand ways to "disclose" these fees without providing meaningful transparency.

Brooke’s Note: As long as the 401(k) industry is dominated by brokers looking to make a buck and employers happy to go along with that sales culture in the name of expediency then plan participants remain an afterthought. Fancy new rules form the Department of Labor are worth the paper they’re written on. For now, there is still a strong, and perhaps strengthening tide of inertia that is winning the day, according to Scott Pritchard who spends enough time among employers to get a pretty good read on the situation.

First proposed in 2007 by the Department of Labor, Regulation 408(b)(2) was hailed as a game-changer for the 401(k) industry. For the first time, plan sponsors and participants would know exactly what their 401(k) plan was costing them, because 408(b)(2) would finally force service providers to disclose all of the compensation they receive from a plan. See: Why the DOL’s massive new 401(k) disclosure requirements are a 'very, very big deal’.

The thought was that plan sponsors and participants who had for years been blind to the hidden costs of their retirement plans would suddenly see the light and that implementation of the regulation would result in a massive upheaval of the status quo.

Fast-forward to 2013. 408(b)(2) went into effect last July and the 401(k) world looks radically … the same.

But wait, what happened to changing the game?

Well, a funny thing happened on the way to the Forum. While 408(b)(2) is now the rule of the land, two factors have thus far made the new regulation much ado about nothing:

1. Most 401(k) service providers have continued their mastery of obfuscation.

2. The majority of employers are still more concerned with staying in business than in understanding their 401(k) plans.

Obfuscation cessation

First, I use the word “obfuscation” not in an attempt to justify the 20 extra hours of classes I took to get a minor in English, but because it truly describes how much the 401(k) industry goes out of its way to, in the word’s dictionary definition, “hid[e] the intended meaning in communication, making communication confusing, willfully ambiguous, and harder to interpret.”

This obfuscation primarily happens through myriad “soft dollars” that are levied against 401(k) plans. These fees have lots of names — 12(b)1, Sub-TA, etc. — but they all serve essentially the same purpose: to reward brokers for selling a mutual fund.

408(b)(2) was supposed to pull all of these fees out into the light of day, but Wall Street lawyers had plenty of time between 2007 and last July to create slight-of-hand ways to “disclose” these fees without providing meaningful transparency. See: DOL tells employers when they must fire advisors to 401(k) plans. See: What we all feared: 'Better’ disclosure yields worse results, according to Yale professor’s study.

I’ve yet to see a 408(b)(2) disclosure from a large service provider that provides a clear, succinct description of services provided, fees paid, and fiduciary status. What I have seen are lots of references to other documents, footnotes, and lengthy appendices.

For example, a recent 408(b)(2) disclosure I reviewed from a leading 401(k) service provider was 51 pages long, including five pages of “Other Fees and Compensation” and 29 pages of appendices. Does anyone really expect a plan sponsor to read, much less understand, 51 pages of disclosures?

While these so-called “disclosures” may meet the letter of the law, they certainly don’t meet the intended spirit of transparency.

'A tomorrow thing’

Second, while we are more than four years removed from the Great Recession, many companies still feel its effects. The stock market has recovered to historic levels. Housing has begun to rebound. Unemployment is down. And yet, there is still a lingering need to do more with less.

In this environment, company owners, CFOs and HR managers — the very folks who are receiving the 408(b)(2) disclosures from their service providers — are understandably focused on top-line growth and operational efficiencies. Saving for retirement is a tomorrow thing.

Making payroll is a today thing. Employers simply aren’t going to take the time to decipher a 51-page disclosure, much less undertake an upheaval of their 401(k) plan. See: Erring 401(k) plan advisors seek do-overs from DOL to ward off potentially crippling fines.

I recently heard an HR manager for a large, Atlanta-based manufacturer say a few weeks ago that “We’re dealing with issues far bigger than our 401(k) plan every day.” She went on to hedge that comment saying that she knows the 401(k) plan is important, but that as long as it is low-maintenance she’s not worrying about it.

Thus, business as usual continues in the 401(k) marketplace.

Not-so-fine print

Here’s a just a small example of disclosure language from a major custodian (the name of which has been removed):

Summary of Participant Authorized Servicing Fees

The table below outlines the participant authorized fees charged to your retirement account, which are not included in the above estimates. Please remember that additional fees may apply based on the circumstances detailed later in this report.

SRPS Participant Transaction Fees See details $650.00
CSCO Transaction Fees Per Transaction $4,685.00

The estimated annual amounts illustrated above for asset-based fees are calculated using a snapshot of assets held on the date of this report multiplied by the fee formula for each underlying fund as applicable for the service/fee type.

The estimated annual amounts illustrated above for transaction driven fees are based on historical information for your plan.

X Entities

One or more of the following X entities may work together to provide services to your plan accounts and may share the proceeds of fees and other compensation disclosed in this Report. Unless specifically noted, the term “X” refers to these companies and their affiliates:

X Inc.(EIN#XXX-XXXXX) X Bank (EIN#XXX-XXXXX) X Retirement Plan Services, Inc. (EIN#34-1479833 $XXX-XXXXX) X Investment Management, Inc. (CSIM – EIN#XXX-XXXXX)

RIAs to the rescue

But there is still hope.

Despite these dual headwinds, I still believe that 408(b)(2) can achieve its original purpose. I still believe that employers want to do the right thing for their employees. I still believe a marketplace with transparent pricing will reward those who provide quality at reasonable cost. See: RIAs are starting to create their own 401(k) companies as alternatives to John Hancock and The Principal.

But plan sponsors need help. They can’t decipher 408(b(2) disclosures on their own. And that’s where independent, fee-only RIAs can come to the rescue. We have to step in and help plan sponsors decipher the opaque disclosures they’ve received from other service providers. See: The head of a $12 billion RIA spars with UBS and LPL execs on the great fiduciary debate.

Once we help plan sponsors actually realize what they’ve been paying for the level of service (or lack thereof) they have received, I believe that many of them will finally make the time to improve the retirement security of their employees by enhancing their 401(k) plans.

Maybe then 408(b)(2) can be the true game-changer the 401(k) industry so desperately needs.

Scott Pritchard is the Managing Director of Advisors Access, the turnkey 401(k) solution from BAM Advisor Services. Advisors Access helps more than 200 RIA firms across the country be successful in the 401(k) business.


Mentioned in this article:

BAM Advisor Services
TAMP
Top Executive: Mont Levy




Stephen Winks

Stephen Winks

April 12, 2013 — 6:59 PM

408(b) 2 has not been a flop. The Big record keepers clearly can not meet the new reporting requirements, creating opportunity for those innovators who can. It is not a question of ignoring the statutory requirements essential to anyone who renders advice to 401(k) plans. There are highly coveted solutions in the space presently in the process of a bidding war from our largest institutions.

Heaven help those that are not aggressively trying to manage to the now required outcome.

The requirement still exists—it represents market share which will be lost for those that cannot adapt to include the largest and least nimble players in the business.

SCW

Brooke Southall

Brooke Southall

April 11, 2013 — 7:25 PM

Chris,

That should be framed.

Brooke

Chris W.

Chris W.

April 11, 2013 — 7:22 PM

Here is one of my favorite lines from a 34 page 408(b)(2) report from an insurance provider that I just read the other day.

“We want you to know that additional compensation creates a potential conflict of interest in the form of an additional financial incentive for us to include a Fund on our Investment Option Menus and/or undertake more focused marketing for that Fund, as compared to other Fund.”

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