Advisors should be ready for increased 401(k) business opportunities when new compliance regulations become law

By Don Wilkinson

DFW & Associates


President Harry Truman said it best: “If you can’t stand the heat, get out of the kitchen.” That may be the case for a number of investment plan service providers when participant disclosure rules take effect on Nov. 1, 2011. This means advisors who would love to have or expand 401(k) and other plan business will have an opportunity to gain traction in this area, providing they are prepared to adhere to the new rules.

President Harry Truman said it best: “If you can’t stand the heat, get out of the kitchen.” That may be the case for a number of investment plan service providers when participant disclosure rules take effect on Nov. 1, 2011.

The rules stem from The Department of Labor’s October 2010 edict outlining specific disclosures [408(b)(2)] that must be provided to both new and existing plan participants.

These new regulations pertain to any participant directed individual account plan under the Employee Retirement Income Security Act , which covers 401(k), 403(k), profit sharing and money purchase plans.

The new participant disclosure rules are tedious and complex and in spite of a year to prepare, are sure to catch some providers such as brokers/dealers, third party administrators and independent record-keepers, and RIAs who specialize in these investment plans, flat-footed.

This means advisors who would love to have or expand 401(k) and other plan business will have an opportunity to gain traction in this area, providing they are prepared to adhere to the new rules.

Those disclosures will center on general information about the plan eligibility, the administrative expenses necessary to operate the plan, types of expenses that will be charged to a participants’ account, revenue sharing clarification, listed investments under the plan and limitations, if any, to the plan. This information will be provided annually.

Quarterly disclosure must include details on all administrative fees, services, commissions and expenses charged to the account in the preceding three-month period.

Not only that, the DOL requires a glossary of financial terms and upon a participant’s request, the provider will provide copies of prospectuses, financial statements and other detailed information.

These new rules should improve transparency which historically has been lacking with 401(k) plans and others. More transparency should help lower the costs for employers and allow businesses to more easily comparison shop.

A 2007 Government Accounting Office study found that many participants have no idea how much they pay in fees. Information they get from their employers was usually sketchy. In turn, the study found employers too are in the dark, not usually receiving complete information from plan providers, especially in the disclosure of fees.
The loss to the worker who pays excess fees can be substantial; the GAO study found that a one percentage point increase in 401(k) fees can cut a plan participants’ saving 17 percent over 20 years.

Not withstanding, advisors interested in acquiring more 401(k) business should begin now to map out a strategy to be presented to 401(k) prospects, existing clients and plan sponsors.

That means doing your homework with the new regulations, getting in front of these income sources, reviewing all the disclosure requirements, especially fees and services, giving a side by side comparison of your service agreement compared to what they have now. Finally, negotiate fees reduction and improve services where prudent.

Advisors can benefit from the new regulations and the sentiment of participants and sponsors. Approach these prospects and contacts with a clear message that you are offering them a complete 401(k) service with lower fees and improved transparency.

We believe many plan sponsors think they have been paying zero in fees. Once they find out that’s not true, many sponsors may want to change investment companies immediately. This provides an opportunity for advisors to “take over” the plans adding major assets to their firm’s asset base. Don’t miss this opportunity, as there is only a limited window.