The Economics of Providing 401k Plans: Services, Fees, and Expenses, 2021
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2022 ERISA 403b Advisor Conference The NAPA/NTSA ERISA 403b Advisor Conference is a new industry event designed for experienced professionals working with ERISA 403b plans. This conference has been built specifically for ERISA 403b specialist advisors and consultants to gain insight from top thought leaders, share ideas with peers, build a national network of contacts, learn innovative techniques for improving retirement outcomes, and much more. Click here for more information. In This Issue
Insight: Studies, Research, and White Papers The Economics of Providing 401k Plans: Services, Fees, and Expenses, 2021 Key findings: 401k plan participants investing in mutual funds tend to hold lower-cost funds. The expense ratios that 401k plan participants incur for investing in mutual funds have declined substantially since 2000. The downward trend in the expense ratios that 401k plan participants incur for investing in mutual funds continued in 2021. 401k plans are a complex employee benefit to maintain and administer, and they are subject to an array of rules and regulations. Employers and employees generally share the costs of operating 401k plans. Source: Ici.org What Does Consistent Participation in 401k Plans Generate? This paper provides an update of a longitudinal analysis of 401k plan participants drawn from the EBRI/ICI 401k database. Because the annual cross-sections cover participants with a wide range of participation experience in 401k plans, meaningful analysis of the potential for 401k participants to accumulate retirement assets must examine the 401k plan accounts of participants who maintained accounts over all of the years being studied (consistent participants). Source: Ebri.org A Top Barrier to Retirement Saving: Education Costs A quarterly tracking survey of experienced investors finds that education costs are having a significant impact on young investors' ability to save for retirement, but legislative relief could be coming soon. According to the results from E*TRADE from Morgan Stanley's most recent wave of StreetWise, the No. 1 reason Millennial and Gen Z investors take early withdrawals from their retirement savings account is to pay for education. Source: Napa-net.org Automatic Enrollment's Long-Term Effect on Retirement Saving This paper finds that 401k savings plans are increasingly offering automatic enrollment coupled with higher employee default deferral rates. Automatic enrollment almost doubles plan participation and successfully gets participants who might not have otherwise saved, saving. Automatic enrollment combined with automatic escalation creates better participation and savings outcomes. Source: Troweprice.com 401k Mutual Fund Expense Ratios Continue to Drop The downward trend in the expense ratios that 401k plan participants incur for investing in mutual funds continued in 2021, according to a new report from the Investment Company Institute. For equity mutual funds, the average expense ratios incurred by 401k investors declined from 0.39% in 2020 to 0.36% in 2021, the ICI notes. Source: Asppa.org IRA Investors Pay Significantly More Than 401k Participants Rolling retirement assets into an IRA can result in far higher costs to the individual retail investor than their institutional 401k participant counterpart. "An analysis of fee differences shows that the routine shifting of billions of dollars each year from 401ks -- which are often able to purchase lower-cost institutional shares -- into IRAs in which savers frequently purchase retail shares can translate into significantly higher costs for retail investors, costs that can eat into their long-term savings significantly," a new Pew Charitable Trusts report finds. Source: 401kspecialistmag.com »» Click here for More Studies, Research, and White Papers Items of Special Interest to Service Providers Advisors Unprepared for New 401k Rollover Rules Big changes to retirement plan and IRA rollover rules will happen this Friday, July 1st. Yet too many advisors are unwilling or unable to take Prohibited Transaction Exemption 2020-02 seriously, and it's a problem, says ERISA expert and Faegre Drinker Partner Fred Reish. Source: 401kspecialistmag.com The ERISA Fiduciary Advice Exemption DOL rules prohibit a plan fiduciary from using its fiduciary authority to benefit itself or an affiliate. A prohibited transaction involving a retirement plan cannot be cured through disclosures, and violations can lead to the potential for excise tax liability. Importantly, when an adviser deals with IRA clients, ERISA's fiduciary duties do not apply, but the prohibited transaction and excise tax provisions of the Code do. In this article, Groom attorneys discuss DOL-Prohibited Transaction Class Exemption 2020-02, which is a continuation of the DOL's efforts to further regulate interactions between financial professionals and retirement clients. Source: Groom.com Court and Legal Sixth Circuit Addresses Key Issues in Excessive Fee Lawsuits The Sixth Circuit's published decision is a major development in the landscape of litigation challenging the investment options and recordkeeping fees in 401k plans. Smith is the first published Court of Appeals decision to articulate the governing standards for evaluating ERISA imprudence claims at the pleading stage after the Supreme Court's recent decision in Hughes v. Northwestern University. Source: Groom.com Excessive Fee ERISA Complaint Targets Cook Group The plaintiffs allege that, instead of using the plan's bargaining power to benefit participants and beneficiaries, the Cook Group defendants selected and retained high-cost investments and agreed to excessively high compensation for recordkeeping, administration, and other fees compared to available alternatives. Source: Planadviser.com Kellogg Faces ERISA Managed Account Fee Complaint The main allegation leveled in the complaint is that the defendants breached their fiduciary duty of prudence by requiring the plan to pay excessive recordkeeping fees and managed account fees, and by failing to timely remove their allegedly high-cost recordkeepers. According to the complaint, the plan contracted with Transamerica Retirement Solutions between 2016 and 2020 before transitioning to Fidelity Investments in 2021. Neither recordkeeper is named as a defendant in the lawsuit. Source: Planadviser.com »» Click here for more Court and Other Legal Issues Legislative and Washington DC Financial Privacy Bill Could Affect Providers A key House Republican has released a discussion draft of financial data privacy legislation that could impact how retirement plan providers and administrators collect and share consumers' personal information. If enacted, it could have any number of implications for the retirement industry, including in relation to the sharing of data with third parties, administering financial wellness programs, or being sued for unauthorized access or sharing of information to name a few. Source: Asppa.org »» Click here for more on Legislative and Washington Actions Cyber and Plan Security 2022 Advisory Council to Report on Cybersecurity Insurance and Employee Benefit Plans The 2022 Advisory Council hopes first to gain an understanding of cybersecurity insurers and the current market for cybersecurity insurance. This will include learning about insurers that are writing cybersecurity insurance coverage, the underwriting standards that insurers use for such insurance, and controls that insurers require or recommend that insureds have in place as a condition to underwriting coverage for cybersecurity risk. The Council also intends to investigate the terms of typical cybersecurity insurance policies. Source: Dol.gov »» Click here for more on Cybersecurity Issues Compliance and Regulatory Is Your Employee Benefit Plan Adequately Covered by an ERISA Fidelity Bond? Section 412 of ERISA requires every person who handles funds or other property of a plan to be bonded (excluding certain exempted individuals). Such persons include plan fiduciaries but may also include any director, officer, or employee of the fiduciary. It is highly recommended that each plan sponsor frequently assess the bonding coverage to comply with requirements and to prevent any associated risks. ERISA does not require fiduciary liability insurance, however, it should also be considered as protection against fiduciary breaches. Source: Eisneramper.com What is Missed Deferral Opportunity? After a sustained outcry from the retirement plan community, the IRS came up with a correction that would make participants "whole" by requiring a corrective contribution from the employer, not for the missed deferrals, but for the missed tax deferral opportunity that the deferral of compensation provides. This is what is meant by the missed deferral opportunity. While this may not technically restore the plan to the position it would have been in had the failure not occurred, it generously restores the participant to the benefit they would have had if the failure had not occurred. Source: Erisadc.com How Retirement Plans Can Correct Required Minimum Distribution Errors When an error in administering required minimum distributions from a defined benefit or defined contribution plan violates Internal Revenue Code requirements, plan sponsors may be able to fix the problem by making corrective distributions under IRS procedures. This article outlines the solutions available when qualified or 403b plans miss or miscalculate RMDs. The coverage includes streamlined procedures for plans applying for IRS approval of a proposed correction and options for requesting a waiver of participants' excise taxes. Source: Mercer.com »» Click here for more Compliance and Regulatory Material Marketplace News SageView Expands Pacific Northwest Presence Ubiquity Retirement Adds 3(16) Administrative Fiduciary Services
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