Make Retirement Plans Affordable

By Harold Jackson

 

There have been tremendous efforts to provide incentives for small business owners to establish and maintain retirement plans. However, additional fee disclosure requirements could possibly undo this progress.

 

First, a heavier administrative burden would disproportionately impact small businesses, which don't have dedicated human resources staff like larger companies.

 

Second, changes to bundled fee arrangements would severely impact small businesses because many of them rely on these one-stop shopping arrangements to control costs. Even so, small businesses are often subject to high administrative fees due to the scale of assets in the plan. According to the Small Business Administration, retirement plan administrative costs for large companies (more than 500 employees) average $30 to $50 per participant, while average administrative costs for companies with 200 or fewer employees are more than $400 per participant. 

 

Finally, changes to fee disclosure rules could create additional liability for small businesses. Small businesses that have a difficult time obtaining fee information from their service providers in a format that they can easily digest and provide to their participants are especially vulnerable.

 

Policymakers considering changes to retirement plan fee disclosure rules should adhere to the following principles:

 

The importance of plan fees should be considered in the appropriate context. Participants making investment decisions should not rely solely on the fees associated with the investment option. Other factors, such as historical performance and investment risk, should be considered.

 

Fee disclosures to participants should be useful and easy to understand. Fee information provided to participants should be stated as clearly as possible and should be included with notices required to be sent to participants. In addition, participants should only be notified of fees that they pay; fees paid by plan sponsors should not have to be disclosed to participants.

 

Disclosure requirements should not be unduly burdensome. Disclosure information should not be so long as to overwhelm participants. Plan sponsors should have flexibility in how they design and distribute notices (e.g., electronic, paper, intranet).

 

Small business plan sponsors may require additional consideration. Potential legislation should consider the additional burdens and obstacles that may be placed on small business plan sponsors.

 

Guidance on plan fee disclosure is best provided by the Department of Labor. Regulatory guidance from the Labor Department and the Employee Benefits Security Administration is preferable to amending ERISA (Employee Retirement Income Security Act) because it's quicker and allows an opportunity for comment and discussion.