In an effort to make retirement plan fees more transparent for plan sponsors and participants, the U.S. Department of Labor (DOL) has long attempted to add new regulations to the Employee Retirement Income Security Act of 1974 (ERISA). Widely unknown to those it will affect, revisions to Section 408(b)(2) contain a new mandate for thorough disclosure of direct and indirect fees charged by service providers on covered plans.
What types of plans are covered?
All ERISA governed plans are subject to this new regulation. Examples include 401(k)s, 403(b)s, profit-sharing plans, and defined benefit plans such as traditional pensions.
Does this apply to me?
The new fee disclosure rules apply to all plan fiduciaries associated with an employer, often referred to as a plan sponsor. You may be considered a fiduciary if you:
? Exercise control or discretion over the plan or its administration
? Are a sitting member of the benefits or investment committee
? Are on the board of directors or have influence in selecting investment committee members
? Sign the DOL Form 5500
What is a fiduciary?
A fiduciary is someone responsible for acting solely in the interest of plan participants. Fiduciaries who do not act in a prudent manner may be personally liable in the event of a lawsuit or DOL audit. This means that one’s private assets such as an automobile or bank account may be at risk. Furthermore, all fiduciaries have potential liability for the actions of their co-fiduciaries. Only service providers who explicitly accept fiduciary status and have no conflicts of interest can be considered co-fiduciaries. Though still rare, the most common example of this type of service provider is a Registered Investment Advisory firm that provides unbiased fee-based advice on plan structure and investment selection.
Who is not a fiduciary?
Anyone with a conflict of interest such as a broker, plan provider, or third-party administrator cannot be considered a fiduciary under the law. Most employers fail to realize that their broker, plan provider, or TPA is not a fiduciary and is therefore not obligated to act in participant best interests. It is imprudent and risky to rely on the advice of a non-fiduciary to make important plan decisions about investment choices, plan structure, or service provider selection.
What do I need to do?
As a result of the new 408(b)(2) rules, prior to July 1st, 2012, plan fiduciaries are required to collect and have on hand:
? Specific descriptions of services being provided
? Hard dollar figures for fees including direct and indirect compensation for those services
? Fiduciary status of service providers
After plan sponsors collect this information they are required to:
? Benchmark costs to the marketplace to ensure that they are reasonable
? Disclose costs to participants on a per-account basis in a clear and understandable manner
Why all the trouble?
The purpose of these new rules is twofold: to shed light on the excessive and hidden fees imposed by many service providers, and to clarify who is acting in a fiduciary capacity to the plan. For too long plan sponsors have been in the dark about how much money they are paying and where it is all going. This problem has been exacerbated by plan sponsors neglecting their responsibilities and relying on the advice of non-fiduciaries.
How serious is this?
Given that most suits are settled out of court and itemized reports on DOL fines are not readily available, plan sponsors are likely to underestimate the risks associated with failing to address their plan’s problems. While these risks may be difficult to quantify, they are certain to increase as the DOL ramps up enforcement efforts in anticipation of the new compliance date of July 1st, 2012. Sponsors should prepare for not only increased scrutiny from DOL regulators, but also from their employees. Participants will be able to see for the first time exactly how much they are paying and where their money is going. If plan costs are excessive, employee reactions may range from shock to frustration to outright anger.
What can I do?
Although service providers are required to distribute their fee information, it is the responsibility of plan fiduciaries to ask for and compile the data. When benchmarking fees and service quality, it is imperative that plan fiduciaries use an independent third party who does not receive varying levels of compensation based on plan choice or investment selection.
How will this help me?
The cost of compliance with these rules in terms of effort is certainly not trivial, but can yield significant dividends down the road. If your plan has not been thoroughly reviewed, benchmarked, and renegotiated in anticipation of the new rules, you may find that the process of compliance saves considerable amounts of money. Finally, implementing robust processes to continually reevaluate fees and service quality will conclusively demonstrate that your fiduciary duties are being fulfilled.