The unveiling of the revised Internal Revenue Service Form 5500 comes with both relief and trepidation.
The form promises to improve the transparency of 401(k) plan fees but will be costly and time-consuming to implement, and complex to complete.
Plan sponsors and advisers still have some time to adjust to the changes before the form goes into effect in tax year 2009. But they may face a roadblock if Congress decides to pass a fee disclosure bill next year that would require additional changes to Form 5500.
The form is an annual report that pension plans must file with the IRS. Its newest version is part of an in-depth effort by the Department of Labor to improve disclosure of 401(k) fees.
"The practicalities of implementing the changes are still being worked out. [The form is] complicated," said David Wray, president of Profit Sharing/401(k) Council of America, a national non-profit association based in Chicago. "Even so, I think there's going to be a quantum leap forward in fee transparency."
The focus of the form is to highlight indirect payments, such as 12(b)-1 fees, sub-transfer agency fees, servicing fees and finders' fees. In the past, indirect payments have not been reported.
Even though the form won't be due until July 2010, the new pro-cesses need to be implemented by Jan. 1, 2009, and providers and advisers have to be prepared, said Fred Reish, a lawyer and managing director of the Los Angeles law firm Reish Luftman Reicher & Cohen.
"First they have to study the [changes] and decide how they'll comply with them. Then they have to draft software and beta-test it, and be up and running 13 months from now," Mr. Reish said. "It's coming real fast, and anyone who isn't a big player will have to spend tremendous amounts of money to do all of this."
Mr. Reish doesn't think the form is perfect, but he does believe that it will help less sophisticated plan sponsors understand how much they're paying in fees. The form will also help plan participants understand what money is being spent by the plan, he said.
Most importantly for advisers, Form 5500 offers them an option to try to lure new business once it's clear which fees the sponsor is paying, Mr. Reish said. "Competing advisers can contact the plan sponsors and say, 'I think your plan is too expensive, and here's how you can save money,'" he said.
Many plan sponsors are still determining how to proceed with the changes and are taking a wait-and-see attitude, said Brian Graff, executive director and chief executive of the American Society of Pension Professionals and Actuaries in Arlington, Va.
"There's a lot of significant changes to the form. At this point, people are still in the process of digesting the new Form 5500," he said.
Mr. Graff thinks that it is quite possible that Congress may change the rules for this form in 2008. If Congress passes new legislation concerning fee disclosure, it could add rules to this form.
"No one needs to rush out and do anything," Mr. Graff said. "Who's to say what will happen with Congress getting involved? It's nearly impossible to predict whether or not Congress will enact anything. I think it's a serious likelihood that this will be considered next year."
However, Mr. Reish believes that if Congress makes any changes, it will be to increase disclosure on the form. "If they do anything, they'll increase it," he said. "Whether or not they act, it will be how they view what the DOL has done," Mr. Reish said. "If they view it as too little, too late, then they'll write additional rules."
The possibility that the form will change again makes it difficult for companies that are creating these forms in their databases, said Brian Olson, client services officer for the defined contribution compliance department of Boston Financial Data Services Inc. of Quincy, Mass.
His firm, which provides technical support for providers, already has made a number of changes. But Mr. Olson said it realizes that more changes may be necessary, and has to remain flexible.
"I don't have any confidence that these will stick given the duration between now and the 2009 year," Mr. Olson said.
"The chances of [Congress'] making changes is realistic," he said. "We have to be able to adapt. Service providers need to be nimble more so now than they've been in the past."
Lisa Shidler can be reached at [email protected].
