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401(k) Plan Fee Disclosures in 2011; Plan Sponsors, Are you

Attention 401(k) Plan Sponsors
New Fee Disclosure Rules For 2011
Are You Ready?

Sweeping federal legislation was enacted in 2010 affecting our industry. It was part of the
Dodd–Frank Wall Street Reform and Consumer Protection Act.

What this creates in 2011 for 401(k) retirement plans is significant, and much needed. Since we at
David Gratke Wealth Advisors, LLC act as fiduciaries for retirement plans, we believe that these
disclosures are way over due. The main thrust of the legislation requires full disclosure of ALL fees
within 401(k) plans.

The legislation roll-out looks something like this:

July 2011: Aggregate Plan Fee Disclosure (Section 408(b)(2))

Who receives: 430,00 plan fiduciaries

What is disclosed: The total expense to the plan and all its participants
Minimum: disclosures required only if fees are in excess of $1,000 per year
Must potential conflicts of interest be disclosed in the fee disclosure? Yes

November 2011: Participant Fee Disclosure (Section 404(a)(5))

Who receives: 72 million plan participants

What is disclosed: Each participant’s individual portion of total plan expenses
Must there be fee disclosure for each provider servicing the plan? Yes

What is at stake here?

A November 2010 study by DALBAR, Inc (click here for a copy of the 31 page report) was

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From the Desk of David Gratke » Blog Archive » 401(k) Plan F...

headlined: “ERISA 404(a)(5) A Game Changer?” Yes, it quite possibly is a game changer as plan
sponsors and plan participants see, for the very first time, the cost of their 401(k) retirement plan.

What are the possible ‘game changers’ discussed in the DALBAR report?

Unintended Consequences — reveals the potential combined effect of the 2008 market collapse, tax
policy and upcoming fee disclosure on participants and their possible decision making process. In the
past ten years, investors have seen two major market corrections, uncertain income tax rates and the
coming 2011 401(k) fee disclosures. Could this become a tipping point for investors to make irrational
decisions as a result?

Employer and Employee have different requirements – Disclosure for plan sponsors via 408(b)(2)
is somewhat different than disclosure to plan participants via 404(a)(5). Expect confusion!

Effect on Investment Products — What might be the effects by investors if there is no aggressive
response by investment providers? If the fund industry does not respond effectively, expect more
participant confusion.

Spillover Effect – discusses how change in participant behavior may occur, such as causing investors
to have heightened interest in fees embedded in other non-401(k) financial products.

Disclosure Confusion – Expect spikes in inquiries from participants, flooding customer service
departments and plan sponsor human resources/benefits departments with questions and concerns.

“Section 404(a)(5) of ERISA for plan years beginning November, 2011, requires that every one of 72
million plan participants are told something that they never knew… how much they pay each quarter
for their 401(k) plan. In fact, most participants believe they pay nothing for the services provided in
their 401(k).”

-Source: DALBAR November 2010 and DoL Fact Sheet

Example of cost where cost adds no value

Most employers understand that index funds by nature have low annual expense ratios since they do
not actively trade holdings. One would expect to pay less than 50 basis points for such a typical S&P
500 index fund. Then why is it that our work routinely shows plan sponsors incurring expense ratios
of 150 basis points for the same fund?

Also waiting in the wings…..

“The regulatory environment for financial advisors is in flux. Most significant among these changes
is what standard of care advisors will adhere to when serving the public. Advisors (such as David
Gratke Wealth Advisors, LLC) who are fiduciaries are legally and ethically obligated to do what is in
their clients’ best interests.

Brokers, on the other hand, have no current legal obligation to do what is best for their clients. They
are held to a lower standard, which says their advice only has to be “suitable” for a particular
client’s situation.

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From the Desk of David Gratke » Blog Archive » 401(k) Plan F...

The Department of Labor is considering a proposal that would expose conflicts of interest in
retirement plans by requiring brokers to declare whether they are acting as fiduciaries. In most cases,
brokers are not required to act in a fiduciary capacity, so this will be an eye opener for companies
with 401(k) plans.

An additional provision would require brokers to provide detailed overviews of their services and
sources of compensation. This disclosure may also come as a big surprise to plan sponsors.”

-Source: FI Guide

Ok, I am a Plan Sponsor-What Should I Do Now?

Review your current 401(k) plan for fee and performance disclosures
Review your Investment Policy Statement (IPS). Are you following it to measure why you
selected your current provider? Is that current provider meeting the stated goals and objectives
within your IPS?
Has your service provider reviewed your plan with you in the past twelve months?
Do you have an investment committee? Are there minutes documenting 401(k) plan reviews?
How much are you paying for your plan, in plain English?

If you’d like to read more about the new fee environment, here are some good articles….

The 401(k) fees every investor must know [San Francisco Chronicle]
Explaining the fiduciary debate [Kiplinger’s]
Eleven commitments an advisor should make to their clients [Financial Advisor]
How fee disclosure will affect your 401(k) [U.S. News & World Report]
Plan sponsor quick tips: The 401(k) glossary [401k Basics]

Contact David Gratke Wealth Advisors to review your 401(k) Plan

Let us review your plan with look at plan performance, plan costs, success of your employee
education program and lastly, your fiduciary liability. From there, let us offer a strong
recommendation where needed in order to redirect your plan’s resources in a more purposeful,
productive fashion. Click here to contact us.

This entry was posted on Monday, January 10th, 2011 at 2:34 pm and is filed under 401(k) Plan Review, ERISA 404(a)(5),
ERISA 408(b)(2), Fiduciary, Registered Investment Advisor, Retirement Plans. You can follow any responses to this entry
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