401(k)s are clearly now in the public eye, if not mind. If you're involved in any way with your company's 401(k) plan, you've been on the receiving end of a lot of communication about this topic.
I will try to put it all in perspective for you with some suggestions about dealing with the Department of Labor's recently released ERISA Section 408(b)(2) interim final regulation on fee disclosures by service providers.
Matters regarding plan fees start, of course, with the Employee Income Security Act of 1974, which has three basic mandates that permeate throughout all 401(k) plans:
1. Plan fiduciaries are required to act solely in the interest of plan participants and beneficiaries.
2. Plan fiduciaries must ensure that plan assets are being used exclusively for the payment of plan benefits or for defraying "reasonable" administrative expenses.
3. Fees for services between a plan and a "party in interest" (for example, trustee, investment consultant or recordkeeper) must be "reasonable."
As mentioned above, DOL issued the 408(b)(2) Interim Final Regulation to provide plan fiduciaries with the information they need to determine the reasonableness of compensation paid to service providers. It also helps fiduciaries understand how those services are affected by potential conflicts of interest.
Because the final regulation had significant changes from the proposed regulation, which was issued in 2007, DOL published the regulation as an "interim final regulation," allowing for an abbreviated comment period, which ended on Aug. 30.
Some observers believe that some aspects of the interim version itself could be changed. Regardless, the regulation will be effective July 16, 2011.
Final rule requirements
The final rule sets forth the requirements under Section 408(b)(2) that must be followed in order for your plan to avoid a prohibited transaction, the financial consequence of which can be very costly to a plan fiduciary. Here's what the final regulation requires:
1. The final disclosure requirements apply to defined contribution and defined benefit plans covered by ERISA. Health and welfare plans, SEPs, SIMPLEs and IRAs are exempt.
2. Covered providers will be required to provide disclosure of the services they provide and fees they "reasonably expect" to earn under any contract in which they expect to earn $1,000 or more.
3. These providers would generally include fiduciary services, recordkeeping or brokerage services, and virtually anyone who is being compensated indirectly, e.g., accounting, auditing, actuarial, consulting firms, etc.
There will be two basic disclosures: disclosure of services and compensation, and ongoing disclosure obligations. Under disclosure of services and compensation, the following principles apply:
1. Information required to be disclosed by plan service providers must be furnished in writing to the plan fiduciary. The rule does not require a formal written contract delineating the disclosure obligations.
2. Information that must be disclosed includes a description of the services to be provided and all direct and indirect compensation to be received by the service provider, its affiliates or subcontractors. Direct compensation is compensation received directly from the plan. Indirect compensation generally is compensation received from any source other than the plan sponsor, the covered service provider, an affiliate or subcontractor.
3. Because certain services and costs are so significant or present the potential for conflicts of interest, information concerning those services and costs must be disclosed without regard to whether services are furnished as part of a bundle or package. For example, service providers must disclose whether they are providing recordkeeping services and the compensation attributable to such services, even when no explicit charge for recordkeeping is identified as part of the service contract.
4. Service providers must disclose whether they are providing any services as a fiduciary to the plan.
5. Information also must be disclosed about plan investments and investment options. These disclosure obligations are placed on the fiduciaries to investment vehicles that hold plan assets and on recordkeepers and brokers who, through a platform or other mechanism, facilitate the investment in various options by participants in individual account plans, such as 401(k) plans.
Ongoing disclosure obligations include the following:
1. A service provider generally must disclose a change to the initial information required to be disclosed as soon as practicable, but no later than 60 days from the date on which the covered service provider is informed of such change.
2. Service providers also must, upon request, disclose compensation or other information related to their service arrangements that is requested by the responsible plan fiduciary or plan administrator in order to comply with ERISA's reporting and disclosure requirements.
What you should be doing
While July 16, 2011 seems a long way away, it's not too soon for you to start considering how to deal with the new disclosure rule. Service providers are gearing up to meet these new disclosure requirements, and you will soon be receiving written disclosures. As you start to review them, here are two considerations you should keep in mind:
* Do the disclosures satisfy the requirements of the regulation?
* Is the compensation paid the service provider reasonable based on the services rendered?
As with any fiduciary function, be sure to document your review.
But what about those service providers do not furnish you with the required information? You should ask them to furnish you with the information, and if they do not, you take the steps necessary to avoid a prohibited transaction as discussed below.
Fortunately, the regulation provides specific relief to plan fiduciaries who do not receive the proper disclosures required under the rule.
The responsible plan fiduciary, upon discovering that the covered service provider failed to disclose the required information, must request in writing that the covered service provider furnish such information.
If the covered service provider fails to comply with such written request within 90 days of the request, the responsible plan fiduciary must notify the DOL of the covered service provider's failure.
The responsible plan fiduciary, following discovery of a failure to disclose required information, shall determine whether to terminate or continue the contract or arrangement. In making such a determination, the responsible plan fiduciary shall evaluate the nature of the failure, the availability, qualifications, and cost of replacement service providers, and the covered service provider's response to notification of the failure.
For many plan sponsors, the disclosure of what their plan is actually paying in expenses will be an eye opener. But here's my caveat. While plan fees are, of course, important, it's only one element in making a retirement plan successful, which I define as giving employees the best opportunity to have sufficient income at retirement.
Some of those other elements include compliance, employee communication, investment education and just old-fashioned customer service. The difficult part of this process will not be benchmarking fees, but rather, balancing cost and quality of service provided.
Contributing Editor Jerry Kalish is the president of National Benefit Services, Inc., a Chicago-based employee benefit consulting and administrative firm. He blogs at The Retirement Plan Blog (www.retirementplanblog.com). This information should not be considered tax or legal advice. Plan sponsors should consult qualified advisers to determine the application of the new disclosure rules to their specific situations.
Employers streamline DC plans
Nearly 60% of defined contribution plan sponsors plan to take action in the next 12 months in response to increased Department of Labor and IRS audit and enforcement activities, according to a Mercer survey.
In preparation for new fee disclosure rules, 53% of plan sponsors surveyed indicated they will conduct an administrative fee benchmarking study; 28% will re-evaluate who (participant or employer) pays administrative fees; and 21% will change from a nontransparent bundled pricing arrangement to a transparent, fixed administrative fee pricing arrangement.
"Managing DC retirement plans has beecome more and more of a challenge for plan sponsors," says Amy Reynolds, partner in Mercer's DC plan retirement consulting business.
"DC plans were originally intended as supplemental savings vehicles to complement traditional defined benefit plans," Reynolds observes. "But today, DC plans are the ongoing and primary employer-sponsored retirement plan for most Americans and are therefore under much more intense scrutiny. Employers are prioritizing their resources to respond to increased fiduciary concerns, regulatory activity and governance requirements, with less focus on participants' retirement savings."
In order to mitigate these growing concerns, of the employers who plan to proactively change course, 65% plan to conduct an internal review of plan operations. In addition, 27% intend to engage their vendor to review administration while 22% will conduct an independent operational compliance review. K.K.
