Human Capital & Careers

Will New Rules Nudge Up 401(k) Costs?

A proposed law could trigger pass-through costs from plan providers to sponsors.
David McCannFebruary 18, 2011

The cost of 401(k) plans could be poised for an uptick, thanks to proposed legislation in Congress that would require more disclosure from plan providers and sponsors.

Sponsored by three U.S. senators, the bill would require 401(k) plans to annually disclose an “annuity equivalent.” This would show how much monthly income participants would receive upon reaching the plan’s normal retirement age if they used their current account balance to buy a life annuity now.

The proposed legislation is in its third incarnation, having gone nowhere in 2007 and 2009. It may stand a better chance to pass now, however, given growing awareness of the need to help secure retirees’ finances.

Mark Gutrich, CEO of ePlan Services, which administers 401(k) plans for small companies, says that if the bill becomes law, his costs might rise by at least 5% — and plan sponsors’ costs would go up, too. “It would be nice to say we could do that extra work for the same fees, but everyone has a profit margin,” he says.

The additional cost would come on top of any cost impact from three new disclosure rules devised by the Department of Labor. One, which took effect last year, requires plan providers to disclose to the government more information on their direct and indirect compensation for administering plans. A second rule, which would be effective on January 1, 2012, mandates the disclosure of similar information to plan sponsors. The third rule, slated to kick in on November 1 of this year, requires plan participants to be informed of fees charged to them within the plan’s investment options, and the historical performance and applicable benchmarks for every investment option.

Gutrich says the proposal to include annuity equivalents in benefit statements is particularly vexing. The bill seeks to mimic the annual disclosure of expected retirement benefits from the Social Security Administration, but the attempt makes no sense, Gutrich contends. Social Security, he points out, is a defined-benefit plan where participants have no control over investment of their account balances. Its benefit projections are based on defined, up-front assumptions about annual rate of return, participant salary level, hours worked, and quarters paid.

By contrast, 401(k) projections would involve far more guesswork, says Gutrich. They would require plan providers to make a number of assumptions for the future, about such things as contribution levels, allocation decisions, employer matches, financial-market gyrations, and inflation.

The proposed law would require the DoL, within a year of enactment, to prescribe assumptions that plan administrators could use in calculating annuity equivalents. But Gutrich doubts that all necessary assumptions will be addressed. Overall, he says, the bill is “very typical: politicians talking about complex things in very simplistic terms that resonate with the general public, without any concept of how to actually enact it.”

However, the bill does acknowledge that making benefit projections is complicated. It instructs the DoL to issue a model disclosure that is understandable by the average person, explaining that “the actual annuity payments . . . will depend on numerous factors and may vary substantially from the annuity equivalent in the disclosures.” It further provides that neither plan providers nor employers can be held liable for the accuracy of the annuity equivalents.

Alan Vorchheimer, a principal at Buck Consultants, says the bill’s simplicity will make it less effective as a provider of useful information for plan participants. It’s an example, he says, of politicians “pretending they’re doing something by putting this out.”

Participants are getting so many disclosures now, observes Vorchheimer, that “at a certain point, they’re just going to get tossed in the trash. Anyone who works in plan communications knows there is a real limit to how much you can communicate to people now.”