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What You Need to Start Disclosing to Employees About 401(k) Fees
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Hello new 401(k) notices!
As if the new disclosures required under health care reform weren’t enough to juggle this summer, you need to wrap your head around sharing new data to your 401(k) participants. Yes, data about the fees they pay.
You may remember our article last summer suggesting you gear up for a January 1, 2012, implementation. Well, the principles still apply, and in February the final regulations were released. This is complicated stuff. Luckily, Business Legal Resources has done a lot of the legwork for you
Before you start strategizing how you’re going to take your summer vacation in the midst of all this change, let’s start with the basics:
You’ve always promoted the 401(k) as the best deal in town, as you should. The match and tax savings should continue to be the headline of this story. Now you also have to explain that your hard work (and economies of scale) mean employees are getting a good deal on fees—but the fees are still there. Here’s the Department of Labor’s example:
You are a plan participant with 35 years until retirement and a current 401(k) account balance of $25,000. If investment returns in your account average 7 percent, and fees and expenses reduce your returns by .50 (½) percent, your account balance will grow to $227,000 by retirement. However, if fees and expenses average 1.50 (1½) percent, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.
So that’s a pretty scary example, right? Examples work. But to mimic the effect for employees, take a different tack. Show them the differences between funds — especially if they are that stark. And you might want to layer in the investment returns for each of the fees. (It might be that the low-fee fund has modest returns over a 10-year period, as opposed to higher-than-benchmark returns in that high-fee fund over the same 10-year period.)
Even still, some industry analysts aren’t convinced participants will actually read the statements. But a MintLife commentator makes a great point: the transparency requirements have caused the industry to pre-empt the regulations with new, lower cost options. Time will tell.
The trick here is to spend time up front on how you’d like to tell this story. Build out a key messages document that:
Once you set your strategy, it will be much simpler to decide how to pace your messages leading up to the initial announcement through the summer enrollment season.