Are You Prepared for the New 401k Regulations

Post on: 24 Август, 2015 No Comment

Are You Prepared for the New 401k Regulations

Life is fraught with challenges – they either manage you, or you do your best to manage them. In this article I’ll talk about new disclosure rules regarding 401k retirement plans and planning issues for participants (savers) and sponsors (employers) to discuss with advisors, including legal and tax experts. The new regulations are complex and unclear.

There are some 73 million participants with $3 trillion invested in retirement plans. Some are pretty astute and others can use some help. In the wake of the ’08 financial crisis, regulators apparently wanted plan sponsors to exercise greater fiduciary responsibility and participants to be more knowledgeable about investing. Greater disclosure of expenses and investment options is helpful; however, compliance comes at a cost.

Plan Sponsors – Promotion of your company’s retirement plan has significant benefits. They can be effective tools for retirement and are ‘standard’ employee benefits. However, compliance with Department of Labor and IRS guidelines can give you grief.  You have fiduciary duties, including the ‘prudent man rule.’ These include updated documentation, diversification, minimizing expenses, monitoring performance, managing for the sole benefit of participants, safety, etc.

Discussion for Sponsors:

  • Periodically meet with your service providers (documents, accounting, investments, etc.). Does it fit and perform well? What are the expenses and are services priced right? Last time you put services out for bid?
  • What trends (your business, regulatory, etc.) necessitate plan modification, and what’s required (cost)?
  • Are plan investments directed by the trustees, or participants? If participant-directed, how are you monitoring their investment options? Who prepares the investment information disclosure? Self-directed accounts are one of the most controversial areas of the regulatory guidelines. DOL had leveled its sights on self-directed open brokerage accounts – carte blanche as to how participant invests – then backed off. Will they resume? Apparently the DOL questions if you can shun your fiduciary responsibilities if participants call their own shots, and instead, favors traditional platform-style 401k accounts (e.g. 5-20 investment options) or professionally managed pooled accounts.

Disclosures to Participants – Complete information, insights and wisdom are crucial for good decision making. You should be getting a better peek behind the curtain on your retirement plan’s expenses, and more information about your investment options, including past performance relative to benchmarks (your stock fund vs S&P).

Discussion for Participants:

  • Are you saving enough and how should you invest? Use a diversified asset allocation or target date fund, or roll your own?  Who to call for assistance, or sit down and discuss what’s best for you?
  • Is ‘cheaper’ better, or past performance an indicator of the future? The first involves the heated discussion of active vs index investing. The second requires understanding why an investment performed well (or poorly), and insights towards the future (e.g. bonds may have been superb the past 5 years, but how might they do if interest rates rise?).
  • What’s the future of your self-directed brokerage 401k account?

The new regulations brought forth a firestorm of controversy, and I feel more guidelines are in the pipeline. My thoughts are (1) the costs of maintaining 401k plans may rise, (2) the days of self-directed 401k brokerage accounts may be numbered, and (3) smart service providers will ‘figure things out’ and provide solutions.


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