Fee Disclosure Can Be Opportunity for Advisers

In September 2012, shortly after the first fee disclosures were delivered to plan sponsors and participants, Oppenheimer Funds conducted a nationwide survey of plan sponsors to gauge the impact of 408(b)(2) and 404(a)(5) regulations. The survey results in the paper, “Regulatory Serendipity: Fee Disclosure Generates Optimism and Opportunity,” revealed that plan sponsors are mostly positive about the disclosures. Substantially more plan sponsors believe that the benefits of fee disclosure already do or ultimately will outweigh the drawbacks (66%), compared with those who believe the drawbacks will outweigh the benefits (27%).

More than one-third said fee disclosure is a positive change, and nearly one-third said it makes their lives easier. Plan sponsors cited the top benefits as helping them meet their fiduciary responsibilities; improving provider transparency; helping them better understand fees relative to services; and making educated decisions about providers. They also think fee disclosures help participants in several ways including feeling more educated about the plan; trusting the plan sponsor; better understanding the purpose of the fees; and familiarizing themselves with the plan.

“I think the overall results were surprisingly positive,” Kathleen Beichert, senior vice president of retirement marketing at Oppenheimer, told PLANADVISER. “This paints the picture of a much more sophisticated and aware plan sponsor than I would have anticipated.” One of the most delightful surprises, Beichert said, is that plan sponsors believe fee disclosures will prompt participants to raise their contributions because of their increased engagement in the plans. This trend of increased engagement is occurring with all plan sizes, the survey found.

Despite their optimism, the survey showed that sponsors need, and are open to, plan advisers helping them with fee disclosure. Sponsors are concerned about the time consumption of fee disclosures; the use of resources that could be better used for other purposes; and an increase in participants challenging plan decisions. “Plan sponsors were very concerned that participants would make changes to their investments [based solely on fees],” according to Beichert.

Only 20% of the survey respondents said they were very confident about what to do with the disclosure information received. This represents a tremendous opportunity for advisers to provide guidance and support, Oppenheimer’s paper stated. A strong majority of plan sponsors do not know how often plan providers are required to furnish information, for instance. In addition, just 9% of plan sponsors surveyed knew the three steps they must take if they do not receive adequate disclosures.

Fee disclosure has “cast a spotlight” on plans from a sponsor and participant perspective, so advisers and providers must take advantage of this opportunity to provide services that help the sponsor navigate through the disclosures by providing the appropriate tools and education, said Laura White, vice president of retirement marketing at Oppenheimer.

Plan sponsors indicated materials/collateral from advisers, investment managers and providers would help the most (29%) with understanding fee disclosure, followed by meetings/education/webinars (18%) and online education (10%).

Although sponsors are concerned that participants will make investment decisions based on fees, it seems that sponsors make provider decisions based on the same criteria. When asked to allocate 100 points to various plan provider selection criteria, sponsors allocated the most points to fees (an average of 22.2. points), almost as much as service quality and the provider’s capabilities combined. This emphasis on fees over value could lead to increased fee compression, the paper warned, so providers must articulate their value. “If you’re not able to articulate why you are not the cheapest provider, you’re really at risk of losing that relationship,” Beichert cautioned.

Fees are also the most important driver of adviser selection, although they are not identified as such a dominant criteria as they are for the plan’s recordkeeper. Many additional factors are considered almost equally important, such as investment philosophy and services. Advisers will need to demonstrate their value to substantiate their fees and, given the importance of services offered, a menu-driven approach to pricing might be optimal, the paper suggested.

Oppenheimer’s online survey was fielded in September 2012 based on responses from 200 randomly selected plan sponsors of all plan sizes across the U.S.