As the defined-contribution industry braces for new fee disclosure regulations, some corporate 401(k) plans — including Nestlé USA Inc. and United Parcel Service Inc. — are light-years ahead of the pack in providing participants with fee information.
As the defined-contribution industry braces for new fee disclosure regulations, some corporate 401(k) plans — including Nestlé USA Inc. and United Parcel Service Inc. — are light-years ahead of the pack in providing participants with fee information.
“We have always been in favor of full disclosure,” said Karin Brodbeck, director of retirement investments for Nestlé USA.
Nestlé's fee disclosure for its Smart$aving program covers three DC plans with $2.3 billion in assets and about 32,000 participants.
In evaluating entries for the 2010 Eddy Awards for superior participant investment education, sponsored by sister publication Pensions & Investments, judges made note of the fee disclosures that Nestlé includes in its initial education materials. They said it was the best among all entries in all categories.
“Nestlé is clearly going beyond what is required,” said Matthew Gnabasik, one of the judges. He is managing director of consultant Blue Prairie Group LLC.
Nestlé's strategy was developed by the company's retirement investments and savings plan administration groups, Ms. Brodbeck said.
Most of the fee information is displayed on a single page. For each of 17 investment choices, there are columns that identify the investment management fee, administrative fee and total fee.
There is also a toll-free number.
Separately, Nestlé provides a brief description of how fees are constructed, noting, for example, that the annual administrative fee includes record-keeping, legal and trustee fees.
The document tells participants that different funds have different fees, and that funds with higher fees and expenses “don't necessarily” perform better than lower-cost funds.
Nestlé credits its ability to communicate clearly with participants to its own relationship with its provider, ING Institutional Plan Services.
“ING provides very itemized invoices that we compare to their agreement,” the contract with ING outlining services and costs, Nestlé financial analyst Denise O'Neal said.
Several consultants said that 401(k) plan providers want to improve their fee communications with participants, but they are waiting for new federal regulations. The Labor Department is expected to issue proposed guidelines on participant disclosure in late summer or early fall.
“We're seeing more sponsors and consultants say, "Maybe we should get ahead of this [regulation],''' Mr. Gnabasik said. Many of those same sponsors, he said, “are waiting for guidance on what level of detail they'll need.”
The situation is similar at Towers Watson and Co. Although clients “are very interested in being proactive in getting out in front,” some are waiting for the Labor Department regulations because “they don't want to be wrong,” said Marina Edwards, the firm's senior consultant for defined contribution.
Officials at UPS didn't feel the need to wait for government regulation. “I really don't see what the big deal is and why people make it a big deal,” said Mary Ann Tweddle, a retirement and portfolio manager.
UPS has provided comprehensive fee disclosure since 2003 to participants in the company's plans for salaried workers and Teamsters union members.
“Don't keep it a secret, or people will think it's a problem,” Ms. Tweddle said. “We review the information from investment managers, and we send it back if we don't understand it.”
When UPS gets a rewritten explanation, “we test-drive it with our own people,” Ms. Tweddle said.
The salaried plan has $3.8 billion in assets and 102,241 participants. The Teamsters plan has $5 billion in assets and 240,525 participants.
UPS talks often with its DC providers — Prudential Financial Inc. for the Teamsters plan and ING for the salaried employees' plan. “We work very closely with them,” including holding quarterly meetings, Ms. Tweddle said.
The UPS fee disclosure documents include a summary and explanation of fees, including a rationale for the fees and how they are calculated, in percentage terms as well as in basis points. There are some differences in the terms of the two plans, but the amount of fee disclosure is extensive for both.
In the salaried plan, for example, UPS provides four columns of information — the name of each investment option, the investment management fee, the trust custody fee and the annualized combined fees for each $10,000 in assets.
The salaried-plan document describes the administrative fee and transaction fees, such as a processing fee for loans and trading fees for a self-managed account. UPS tells employees they always will be informed in advance if a transaction requires a fee.
Consultants say the Nestlé and UPS fee disclosure documents reflect company officials' understanding of costs assessed by providers — something lacking at many plan sponsors.
“The primary issue with fee disclosure is a question of trust,” said Ryan Alfred, co-founder and president of BrightScope Inc., which provides 401(k) analysis and ratings. “If the individual doesn't understand, he's less likely to invest.”
Consultants offer some common guidelines for disclosing fees to participants.
“Point participants toward the path of least resistance,” Ms. Edwards said.
Provide information to participants in simple language, with clear examples and with charts ranging from investment options to a dissection of fees. Don't simply tell participants to read the prospectus, Ms. Edwards said.
Let participants know that you have an internal process for monitoring fees, Mr. Gnabasik said. When you discuss fees, provide an example of how fees will affect an investment, rather than just list the fees, he said.
Don't underestimate the need for simplicity, said Toni Brown, the director of client consulting for Mercer's U.S. consulting business. One example: listing an investment option as a growth-and-income fund.
“That's difficult for a participant to figure what that means and to build it into his own portfolio,” she said. “It would be better to describe the fund as large-cap-core equity.”
Ms. Brown recommends that sponsors tell participants about fees for investment options by comparing these fees to some institutional industry average.
Robert Steyer is a reporter with sister publication Pensions & Investments.
