Data & Research March 15, 2008

Sponsors Lack Confidence About Plan Fees

Plan sponsors may say they are comfortable with fee disclosure efforts as they exist now, but a new study asserts that many of them are racked with under-the-surface doubts about their understanding of the fee issue.
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Plan sponsor concerns about potential legal action, higher plan expenses, and participants selecting suboptimal investments make them less satisfied with their current fee structure and more likely to switch providers, according to study sponsor Chatham Partners. “Plan sponsors are starting to realize what they don’t know about fees. The collective epiphany is going to play into the hands of retirement plan providers at the leading edge of full disclosure,” noted Andrew McCollum, Managing Director at Chatham Partners, in an announcement about the survey.

According to Chatham, 77% of surveyed sponsors indicated that current disclosure levels are sufficient. However, only 58% of respondents feel confident about their understanding of their plan’s overall costs, despite realizing the importance of understanding these costs (79%).

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Not only that, but sponsors are dissatisfied with the level of transparency offered by their existing providers, as evidenced by low scores given to fees being easy to compare to other providers (34%), revenue sharing disclosure (38%), and fee transparency (42%).

Size Differences

The results of the analysis also reveal perception differences depending on the size of the retirement plan. Sponsors of the largest plans (greater than $100 million in assets) have a deeper understanding of plan fees and place greater importance on understanding plan fees than sponsors of the smallest plans (less than $3 million in assets).

According to Chatham, there appears to be a connection between level of understanding and satisfaction levels, as larger plans are also considerably more satisfied with all fee attributes, most notably the total cost of the plan and good value for the money.

Additionally, there is variation between large and small plan sponsors over their concerns regarding fee transparency and disclosure. Specifically, plans with more than $100 million in assets are most concerned that lack of disclosure will lead to legal action by participants, while plans with less than $3 million in assets are most worried that lack of disclosure will lead to higher plan expenses.

The announcement said the vast majority of plan sponsors surveyed (74%) believe that participant fee disclosure is sufficient. However, it is clear that current disclosure efforts have not been entirely successful, as only 22% of plan sponsors report that participants are highly aware of the total cost to them.

Though few respondents indicate that fee transparency is the most important factor in their decisionmaking process, the vast majority of plan sponsors surveyed (81%) indicate that it plays an important role in the outcome of their selection of providers.

The 101-page report’s foundation is in-depth online surveys completed by 416 plan sponsors affiliated with corporate defined contribution plans ranging in size from $1 million in assets to more than $1 billion in assets.

More information is available at http://www.chathampartners.net/.

Compliance March 15, 2008

ING Lays out Action Plan for 403(b)

ING presented information during a Web cast on Friday that gives sponsors, and the advisers who help them, an outline of the impact of the 403(b) regulations and an action plan for dealing with them.
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Linda Segal Blinn, Vice President of Technical Services at ING, discussed requirements of the new 403(b) regulations, including the requirement that all plans have a written plan document and what information the document must include. She also expounded on what new restrictions on contract exchanges and new requirements for monitoring plan transactions and limitations means for plan sponsors.

Segal Blinn suggested sponsors make use of all the information on the new regulations out there from plan providers, the IRS, and others in the 403(b) marketplace, and know what they have to do before moving into the implementation phase. Once sponsors understand what is required, they should assess what they already have in place and think about the different elements they want in their plan design, including the providers they want to use; rules for distributions, loans, and exchanges; who will be responsible for plan oversight; and what additional features they might want to offer participants, such as Roth 403(b) contributions.

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Sponsors should also review collective bargaining agreements to know what is required by them and check state laws that could spell out what rules sponsors have to follow or not, Segal Blinn advised. She said sponsors can pull together provider contract agreements, union contracts, and existing participant communications to see if those items will fit the requirements for a written plan document.

However, Segal Blinn noted that most sponsors are going with a new formal written plan document to be sure all pieces are in place, and this is what the IRS recommends if more than one vendor is offered by the plan.

The decisions on providers whose products will be offered by the plan and the provider who will be responsible for monitoring, if the sponsor decides not to do the monitoring, must be made and service agreements must be in place before the plan document is completed. The IRS requires that the plan document identify contracts available in the 403(b) program as well as the party or parties responsible for oversight.

Finally, sponsors must decide on a communication plan, according to Segal Blinn. Participants have been used to having control over making transactions within 403(b) plans and must know that the rules have changed. Sponsors must decide how best to communicate plan changes, provisions, and participant eligibility, whether it will be via email, a Web site, written communications, or some combination of the methods.

Segal Blinn also advised sponsors to keep documentation of the plan communications including who was notified and how.

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