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Benefits Business

Innovation opportunity

Employee benefits advisors can use new transparency laws to differentiate themselves and document their expertise in the field

By Len Strazewski

Nothing makes independent agents and brokers bristle more than new government regulations, but sometimes regulation can create opportunity for innovation, says investment and retirement industry gadfly Chuck Epstein.

New Department of Labor regulations that call for disclosure of expenses and fees paid to investment fund managers in charge of defined contribution retirement plans create an unprecedented opportunity for agents, brokers and consultants who provide employee benefits guidance to employers, he says.

"For the first time in 40 years—since the launch of the first 401(k) retirement plan—plan participants can find out exactly what their retirement investments cost and who makes money off their retirement plans," Epstein explains. "The new watchword for the investment industry is 'transparency' and the latest government regulations provide the legal tools to create a window into the inner workings of investment funds."

The new rules—DOL 408(b)(2) and 404(a)(5)—went into effect in July and have begun a process of disclosure that will eventually allow employers who sponsor retirement plans and individual plan participants to begin to compare the fees and expenses that have been charged to their plans by the investment industry for plan administration. These 12b-1 fees and the revenue sharing they allow benefit only the investment managers and marketers.

Epstein says 401(k) plan participants pay an average of $164 million daily to investment companies for management fees and expenses.

"For decades, 401(k) service providers and some employers have allowed their employees and customers to be overcharged for services they did not receive. These practices would be forbidden in other corporate departments, yet they occurred in some 401(k) plans."

Epstein, a financial industry insider for more than 35 years, is a leading spokesman for retirement and investment industry reform. He operates the industry blog "" and is the author of a new book,"How 401(k) Fees Destroy Wealth and What Investors Can Do To Protect Themselves, released earlier this year and available from Amazon.

"The financial services industry is essentially anti-customer. It is riddled with conflicts of interest at the retail and institutional levels, which should put all investors on notice that all financial salespeople have different priorities and interests than their customers," he says.

As a result, management fees, commissions and other expenses charged to investment funds have undermined the value of their returns and participants' ability to build wealth for their retirement. When market returns were good, participants never questioned the 12b-1 fees which are not normally disclosed. But in 2008, when millions of participants lost as much as half the value of their defined contribution plans, the fees and expenses came under closer scrutiny.

The steady decrease in defined benefit pension plans and the resulting increase in reliance on defined contribution plans make the issue even more acute, Epstein says.

The number of large U.S. companies offering new salaried employees only a defined contribution plan, such as a 401(k) plan, continued to increase this year, according to an annual analysis by Towers Watson in New York, a human resources and employee benefits consulting company. The analysis found that only three in ten of these companies currently offer a defined benefit pension plan to newly hired salaried workers.

The study reported that 70 companies in the Fortune 100 currently offer only a defined contribution plan to new hires, compared with 67 companies at the end of last year and 63 companies at the end of 2010.

Meanwhile, only 11 employers continue to offer a traditional pension plan, versus 14 companies at the end of 2011, while 19 companies continue to offer a hybrid pension plan, such as a cash balance plan, the same number as at the end of 2011.

"The ongoing shift from DB to DC plans due to cost and cost volatility is helping to create a next generation of retirement-age workers who may not be able to afford to retire when they would ideally like to," says Kevin Wagner, a senior retirement consultant at Towers Watson. "The trade-off of cost versus talent issues is very real and will, without question, affect workforce and productivity issues as the next generation of workers ages."

While the new regulations may seem burdensome for the financial industry, Epstein says they provide a marketing opportunity for employee benefits advisors, who can use the regulations to help differentiate themselves and document their expertise in the field.

"They can reposition themselves better than ever before as advocates for employers and their employees—and document their advocacy with specific analyses of costs."

The regulations also affirm strong fiduciary standards set by retirement law—The Employee Retirement Income Security Act (ERISA). However, those standards have previously been applied only to plan sponsors as trustees, not the actual mutual fund companies that market investments.

"Some investment professionals and consumer advocates are trying to extend those same high standards into the investment advisory industry, including the way 401(k) plans are managed. But this proposal has not been universally embraced," Epstein says.

Benefits agents and brokers can use the new DOL regulations to clearly mark the distinction between those who follow the pro-investor fiduciary standard and other investment professionals who rely on revenue sharing and 12b-1 fees to direct their investment product and management, he says.

In employer and individual seminars and educational communication, benefits agents and brokers can present the benefits of their investment approach, how they select products and services, how their investment offerings have performed, and the importance of monitoring fees and expenses so investors can increase their net retirement accounts over their investment lifetimes.

Epstein also recommends they discuss the importance of containing fees and expenses in retirement plans, how individual investors can improve their product selection and long-term investment results, the investment products and strategies to avoid in retirement accounts and the importance of the fiduciary standard.

These topics should be supplemented with specifics about the agents' own investment approach, product offering and product selection; fee, expense and investment manager monitoring processes; investment oversight and investment results.

Employers benefit from an educational program not only by increasing their ability to make choices for their benefit plans, but also by the improvement in employee relations as they demonstrate to employees how they are protecting their retirement security.

Agents can also use the opportunity to discuss with individual plan participants their comprehensive retirement plans, including the relative value of Social Security as a component of their savings.

Epstein says proposals to privatize Social Security may be the next big investment industry scam. Proposals such as the one introduced by Rep. Paul Ryan (R-Wis.) which would allow Social Security participants to invest up to half of their contributions in private investments would not only undermine retirement security, but simply make even more funds subject to the same fees and expenses charged to 401(k) plans—a big cash boon to the financial industry.

The author

Len Strazewski has been covering employee benefits issues for more than 30 years. He has an M.S. in Industrial Relations from Loyola University in Chicago.


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