Fidelity tries out new DOL-influenced 401(k) fee disclosures on clients -- and gets plenty of response

The retirement king is putting it out there ahead of most competitors, but there is some resentment that Fidelity failed to warn advisors

Tuesday 6.12.12 by Lisa Shidler

Brooke’s Note: When all is said and done, the biggest aspect of the DOL’s rule changes is what is said on the piece of paper read by clients or prospective ones. How they react may determine the fate of 401(k) empires. Since Fidelity currently rules that empire, it was no doubt feeling greater suspense about what the people think who, so to speak, pay its bills. It now has plenty of feedback to work with but was it brusque in jumping in with both feet?

Fidelity Investments became one of the first major record keepers to start sending out the massive new fee disclosure forms to participants and plan sponsors alike back in April and has gotten about 600 calls in response, according to sources familiar with the company. See: Why the DOL’s massive new 401(k) disclosure requirements are a 'very, very big deal’.

Company spokesman Mike Shamrell, while declining to confirm the number of calls it received, says the feedback from participants and plan sponsors has been quite low and that there have been more calls from participants than from plan sponsors. He did not offer perspective about callers’ concerns.

As part of the new Department of Labor fee disclosure rules, vendors must send out disclosures by July 1 to plan sponsors. Further notices spelling out the costs of the 401(k) plans must be sent out to employees by Aug. 30.

Fidelity is the nation’s largest retirement provider — a giant in the defined-contribution arena — with more than 22,000 plans and more than 15.5 million participants. In 2011, Fidelity sold more than 1,400 plans totaling $6.6 billion in assets. In February, Fidelity Investments reported a 57% increase from a year earlier in plan sales to sponsors with retirement assets of less than $50 million. See: Fidelity reports 57% boost in 401(k) sales as it sets its sights on smaller plans and advisors.

Taking it to the deadline

Not all companies started sending out disclosures quite as early. In fact, Charles Schwab & Co. — a competitor in the 401(k) arena, just recently began sending out its notices, according to company spokeswoman Susan Forman. She says the fee disclosures for plan sponsors will be sent out before the July 1 deadline. She also says that the participant fee disclosures will be sent in July and August based on employer preference.

“The real story here, in my mind, is about providing quality data to plan sponsors from our open-architecture 401(k) plan platform that enables them to fully understand their plan costs,” Forman says. “We’re on track to deliver plan sponsor disclosures before the deadline.”

There have been a range of predictions about how participants and plan sponsors will respond to these mandated disclosures. Some have said they will fly by participants while others have forecast a firestorm of calls.

Mike Alfred: Assuming you have nothing to fear, then yes, it makes sense to send them as soon as possible.
Mike Alfred: Assuming you have nothing
to fear, then yes, it makes
sense to send them as soon
as possible.

Is the price right?

One advantage to sending out the notices earlier is making sure all of the information is accurate and that there’s no shock, says Rick Meigs, president of LLC in Portland, Ore.

“It does put the vendor ahead of the curve with their clients and communicates to them that they are proactive and on top of the issue. Plus it allows the vendor (or advisor) to deal with client questions and input, making adjustments if needed. The last thing a vendor wants is to make their disclosures at the deadline then discover some big surprise.”

BrightScope Inc. co-founder Mike Alfred agrees.

“Fidelity has been consistent in providing robust and timely disclosures,” he says. “Assuming you have nothing to fear, then yes, it makes sense to send them as soon as possible to give your clients as much time as possible to prepare for participant questions and concerns later in the year.”

Alfred adds that the early notices give plan sponsors a chance to react and respond to the disclosures. “The other advantage is that it can demonstrate that you are confident that your fees are reasonable and that you have nothing to hide. The signaling issue can be an important one with new regulations like this. The relative simplicity or complexity of participant disclosures will also be a window in to how strong or vulnerable a provider is feeling.”

Disclosures happen

One downside of Fidelity’s early disclosure was that it left some advisors surprised when they learned that companies had begun sending out the disclosures without giving them a heads up.

Advisor Jim Marshall, president and founder of Spectrum Investment Advisors Inc., a Mequon, Wis., RIA with about $775 million assets in management, says he was shocked when he learned from a plan sponsor that Fidelity had sent out a notice.

Marshall has three main firms he uses for 401(k) plans — Great-West Retirement Services, Fidelity and the Principal Financial Group Inc. He said they’ve now all started sending out disclosures but that he was surprised when Fidelity started it so early — back in April.

“It just kind of happened,” he says. “With the larger record keepers, the average advisor really felt blindsided,” he says. “Things went out without much dialogue to the advisor.”

Marshall’s average 401(k) plan is about $10 million to $12 million in assets, but he has plans that are as large as $200 million in assets and as small as $1 million.

When Marshall got the phone call from the plan sponsor, he began to ensure that all of his 401(k) agreements were up to date with the new rules. He feels his company has done an excellent job with participant communication because he has had multiple educational meetings with participants and hasn’t had any calls from them with questions about the dislosures.

unintended consequences

Rick Meigs: The last thing a vendor wants is to make their disclosures at the deadline then discover some big surprise.
Rick Meigs: The last thing a
vendor wants is to make their
disclosures at the deadline then discover
some big surprise.

Marshall’s not alone. In fact, attorney Jason Roberts, founder and chief executive of Pension Resource Institute LLC, which works with RIAs and brokers alike, says a number of advisors have been caught off guard and been frustrated because record keepers have been sending out disclosures without notifying them.

“I’m seeing a lot of unintended consequences.” he says. “They want to carefully construct an information campaign to get these participants aware of the reasonableness of the compensation and explain all of the fees to them so they can understand that they’re not getting gauged.”

Education trail

For its part, Shamrell says, Fidelity communicated a great deal about the disclosures to advisors. He says the firm held webcasts on Sept. 20, and Nov. 2 of last year explaining to advisors how the firm would meet the disclosures and the timing of the disclosures.

The firm also created a brochure for advisors, outlining the regulatory requirement for fee disclosure, that was distributed both electronically and in person by sales and service personnel.

In addition, Fidelity sent all advisors and their plan sponsors a letter confirming that their plan was on Fidelity’s Fee Disclosure Service and providing dates when the disclosure would be sent to participants.

In March, the firm sent advisors and their plan sponsor clients a mock-up of the initial participant disclosure for their specific plan with enough lead time to proofread the document and make corrections.

Rick Meigs | Jim Marshall | Jason Roberts

Fidelity Investments | Charles Schwab | Spectrum Investment Advisors | Pension Resource Institute | 401Khelpcenter