Call to Action

There are frequent refrains in the retirement plan industry that something—often the industry itself—is “under attack.” ExpertPlan Retirement Services Inc.’s Chief Executive Officer and Chairman of the Board Julian Onorato spoke with PLANADVISER about this concept; specifically, the role of fee disclosure, tax policy, the job of the recordkeeper in the current industry environment—and why people need to get involved.

PA: What role is fee disclosure playing in the retirement plan industry? 

Onorato: It’s the key topic that everybody’s talking about. I think the sponsor disclosures are going well. However, I don’t think sponsor disclosures from the open architecture independent recordkeepers are presenting many surprises. Most of us exist today because we always had full fee disclosures—it’s how we were able to compete with the bundled providers before the actual regulations.

Our issues in addressing the new disclosure rules were simply to build the forms under the guidelines to make sure we included every aspect of the disclosure as well as the required performance data. There are still some unanswered questions, so we provide placeholders for that.

Another area that I think remains open because the guidelines are either silent or unclear is how you include the third-party administrator (TPA) when it’s a third-party arrangement. When a sponsor is using both a TPA for ERISA [Employee Retirement Income Security Act] administration and also a recordkeeper, and the TPA is not disclosing its fees on the same form, are we confusing the sponsor? Our congressional leaders did not have the forethought to include TPAs under the guidelines. I know there is some discussion now, and I encourage that.

PA: What long-term implications do you anticipate fee disclosure will have on the pricing of retirement plans? 

Onorato: I believe we should do all we can at a sponsor level. However, I think we went too far with participant disclosure. Let’s not forget that once the participant elects the retirement plan and authorizes payroll deductions, he’s doing that into a trust that’s managed by his plan sponsor. So it’s not an individual account, not an IRA [individual retirement account], not an individual brokerage account.

Therefore, I think we have to ask: Should the participant receive all of this information or will it confuse him? How many participants really understand the rules associated with retirement plans? Very, very few. They think of it as an individual custodial account for an IRA for which they might be paying $50 a year. They don’t realize that they have bankruptcy protection within a 401(k) plan, that they may have access to loans or other plan design features—and they certainly don’t understand the cost of putting their unique statements together or the education and advice they may receive.

So the dilemma after these disclosures are released is the individual participants are going to compare plan fees with what they think the fees are in an IRA account, and the plan fees are likely going to be higher. Participants will ask why, and that pressure could commoditize our industry—and that would be a real shame.

PA: We know that plan sponsors don’t need to necessarily seek the lowest-cost plan or investments. But how can they determine whether what they’re paying is fair and reasonable, as is required? 

Onorato: There are a few vendors out there that have built benchmarking products—which we encourage all plan sponsors to use. We have contracted with Fiduciary Benchmarks to provide benchmark services to our advisers and our existing plans and, through that relationship, ExpertPlan offers a benchmark with every proposal.

When an adviser is generating a proposal, he knows all of his fees, all of our fees and the embedded expense ratio of all of selected funds. So he’s absolutely capable of presenting those fees against a selected default benchmark.

If they’re moving forward with that prospect then they can ask for the actual invoices of the plan’s current vendor to fine-tune the benchmark study during the presale process. With that, the plan sponsor knows exactly what he’s getting into and how fees and services compare among competitors.

It also puts the adviser on notice. Now he has to justify that fee by generating the right rates of return. Were his fees reasonable? Is the rate of return reasonable and is that fulfilling the obligations of the sponsor?

The challenge in doing a full benchmark is determining how to address the value-added services. For instance, how do you show the benefits of online video enrollment and education? It’s tough to capture those other services, and that’s what I worry about at the participant level. It’s just going to drive participants to plan sponsors, who will then be encouraged to say “I want the cheapest price.”

PA: What then is the role of the recordkeeper and the adviser in helping plan sponsors and participants recognize the value for what they’re paying? 

Onorato: Our role is evolving. At ExpertPlan, we have prepared our call center representatives to understand the differences between individual accounts and retirement accounts in anticipation of that disgruntled participant who calls into the recordkeeper to complain about fees. When that participant reaches out to us, we have to somehow calm him down, explain why we think these are appropriate fees, and be that reference for participants.

If we take it a step further, it also means we’re highly encouraged to continue to search and review products offered by other vendors—especially in the area of education and communication.

Plan sponsors will ask why one education vendor was selected over another. The adviser isn’t going to really know, unless he has a very strong back-office. Many advisers don’t have the time or the inclination to do a vendor search for products used by both sponsors and participants, so the recordkeeper must do that for them.

We now are becoming comprehensive financial entities that have to educate our employees about how to manage participants and sponsors. And even all that costs money.

PA: Over the years, many groups have taken aim at the 401(k) tax advantage. Most recently, the Bipartisan Policy Center’s Debt Reduction Task Force suggested slashing the 401(k) plan contribution limit to the lesser of $20,000 or 20% of pay. What implications would a reduction of that type have on the industry?

Onorato: It will lower the coverage, which will hurt the middle-income employee. Only half of privately employed workers have access to a 401(k), 403(b) or 457 plan.

I would venture that a very high percentage of those workers is at a privately held business of 20 employees or less. The principles of those businesses benefit from the current tax-deferred contributions.

That business owner isn’t obligated to offer a retirement plan at all. If we eliminate the current incentives and say he can only contribute $20,000 or 20%, he may decide it is not worth it to offer the plan. He could decide to invest in something else: deferred annuities or collective investment trusts that fall outside the guidelines, for example.

Therefore, what is likely to happen is those employed at small companies, who have an average annual contribution of $5,200—that’s the average annual contribution of an ExpertPlan participant—are going to lose that plan. They will then be left with an individual IRA, and they won’t have the benefits of the retirement plan.

That’s a problem because the best vehicle we’ve ever had in the history of the United States is a private pension 401(k) industry. It encourages people to save their money. Having a plan means once an employee becomes eligible, he’s going to get a notice from the recordkeeper. If he doesn’t enroll he will get periodic follow-up notices. He will be regularly reminded by not just the recordkeeper, but the adviser and plan sponsor, that he should enroll and contribute.

If he’s not covered by a retirement plan, who will remind him? A television commercial, perhaps. Statistics indicate that he won’t save on his own.

That’s what we’re going to lose if we perpetuate­ the concept that it’s unfair that the highly compensated folks have access to ever-increasing­ tax deferral benefits. We must stop that thinking.

PA: So what can those in the retirement industry do? How do plan sponsors, advisers and vendors encourage the current system?

Onorato: The only way to influence this type of policy is to get involved. It works—full fee disclosure came from education and advocacy of our congressional leaders, including both sides of the house. So sponsors, advisory firms and TPAs can’t stay silent and think this will all work out for the best.

That’s why ExpertPlan remains actively involved with the Council of Independent Recordkeepers, a subsidiary of ASPPA [American Society of Pension Professionals and Actuaries]. We have sponsored events annually for various congressional leaders in both the district that my company is in and the district where I live. Those events give us an opportunity to buttonhole our local congressman or senator and explain the ramifications of this desire for revenue collection, which is completely dichotomous with what has encouraged people to save for their retirement.

The whole concept of increased revenue collection from retirement plans is a façade. It’s not tax-free. You’re going to be taxed in ordinary income when you withdraw. If you withdraw early, you’re going to have a 10% penalty put on top.

The only reason we’re discussing this is the Office of Budget Management will only consider a 10-year period on tax collection. Since the distributions extend past 10 years, the retirement plan is considered tax free and potential revenue collection. That is a complete fallacy.

Obviously, this isn’t tax free. We’re going to get our tax revenue during distribution. We’re going to hurt coverage if we change it right now. In this interest to generate revenue to cover expenditures, we have a current tax-and-spend philosophy in Washington. So how do we deal with this 20 years from now? The only way is to encourage people to save for retirement.

I really think everyone needs to pick up a pen, write a letter, and call the local congressional office and say, “I need two minutes of your time. What you’re working on is going to hurt American workers.”

They’re going to remember what you said, and if it’s good for their constituencies—which obviously 401(k) plans, an increase in coverage, and getting people to retire are good for every voter in a congressman’s district—it gives him talking points.

The lobbying in Washington for maintenance and improvement of pension legislation is being done by the smaller independents. We just don’t have enough big-company executives taking an active role in this particular issue.