Although the recent ERISA 408(b)(2) fee disclosure regulations – originally due to go into effect in July – have been pushed back until 2012, as a plan sponsor, are you prepared for the consequences of this sudden dose of transparency?
Make no mistake, plan fee transparency is a good thing, and long overdue. However, it does bring with it new opportunities and responsibilities for plan sponsors. Now that plan fees will be much more visible (even if not more understandable), participants and regulators may have concerns about the reasonableness of fees paid by your plan. So what can you do to prepare for the possible questions?
Understand the Why and How of the Rules
To begin, you must understand the new fee disclosure rules. Next, you must understand how plan fees are paid, and whether your plan’s fees are reasonable. The fee disclosure regulations that have recently been released have three different areas of focus.
5500 Details. The first fee disclosure rules were meant to provide additional disclosure to the government and went into effect in 2009. However, they apply only to plans with more than 100 participants. Starting in 2009, Schedule C of the Form 5500 has required much more detailed fee information to be reported. Form 5500 is part of the public record, so once filed with the Department of Labor, this information is available to everyone, including participants and other plan vendors.
Vendor Services and Fees. The second set of fee disclosure regulations were aimed at plan sponsors (also known as 408(b)(2)) and go into effect in 2012. They require that plan vendors make certain disclosures in writing to plan sponsors. The idea is that plan sponsors can’t determine if fees are reasonable if they don’t know what the fees are. So starting in 2012, vendors must disclose in writing (among other things) a description of their services and any direct (paid by the plan) or indirect (paid by another plan service provider) compensation they are receiving.
Administrative and Other Fees. The last piece of the fee disclosure regulations is directed at plan participants and also goes into effect in 2012. It requires that participants receive information regarding the fees paid from their accounts for both general administrative and record keeping services, as well as participant-specific charges, like loan fees and distribution fees. These fees must be disclosed as part of participants’ quarterly statements (presently, most record keepers net the fees from plan earnings).
This sudden appearance of fees on the participant statements will create concern among participants that should be anticipated and explained in advance. The idea is that participants will serve as better watchdogs if they know the actual amount of fees paid from their account and the information is easily obtainable.
Know the Fees Paid
If we know how much we are paying for the services we are getting, it is usually pretty simple to make a value determination. The problem with retirement plans is that it is difficult to know what the fees are. Fees in retirement plans primarily come from three different sources – fund management fees (operating expense ratios), investment advisory fees (fees paid to individuals for advising plan trustees on the plan’s fund line up, performing enrollment services, etc) and record keeping fees (fees paid to the record keeper for maintaining the individual participant accounts, processing distributions, executing investment transactions, etc).
In general, these fees are usually combined and expressed as an annual percentage of assets. By combining the fees, it makes it very difficult to determine how much is being paid for each service and to each provider (have you ever heard a colleague claim that they don’t pay anything for their plan?).
In addition, providers commonly make payments to other providers (known as revenue sharing) to compensate them for services they provide. The revenue sharing payments, while included in the total, are completely invisible to plan sponsors, unless disclosed. Even when disclosed, revenue sharing payments create conflicts of interest that, while not illegal, should be considered by plan trustees when evaluating the quality of services received.
One example of a conflict is payments from a mutual fund company to a record keeper. These payments influence the record keeper’s decision to include the fund on their platform (as opposed to considering only the quality and appropriateness of the fund).
Prepare to Communicate, Compare and Monitor
So what should you do to prepare for fee disclosure? Begin by following these three steps.
Communicate. First, communicate with participants. Let them know that nothing has changed in terms of the fees charged by the plan. The only difference is how they are shown on their statements. Explain what the fees are paid for. Assembling a 401k platform is a complicated task requiring the coordinated effort of several organizations and disciplines. It is not without cost, but generally, as long as fees are reasonable, the costs are less than the cost of wealth management services delivered on an individual basis.
Compare. Next, benchmark your plan’s fees against other plans of similar size as measured by assets and number of participants. Ideally, the benchmark report should be prepared by an independent entity that has no interest in the outcome. There are a number of benchmarking services that have recently become available. Ask your CPA or plan auditor if they offer the service or can provide a reference.
The benchmark report will help you identify all the fees paid by the plan, who is being paid, any revenue sharing arrangements and provide a comparison of the itemized cost of each service against the average of other plans. This is a great way to determine whether you are receiving good value from your providers.
In addition to fees, many benchmark reports will identify when proprietary mutual funds are being used. Proprietary funds are a conflict of interest and may be cause for concern if their performance is not good relative to their peer groups. Be sure to ask your investment advisor for a fund monitoring report that compares your plan’s funds against appropriate benchmarks and peer groups.
Monitor. Finally, implement a process of ongoing monitoring to hold plan providers accountable. A recommended best practice is to request proposals from other providers every three to five years to be sure your plan’s fees remain competitive. And document all the decisions you are making regarding the plan so that you can show inquisitive participants and regulators that you are fulfilling your fiduciary responsibilities. At the end of the day, the amount of fees that you are paying is not the issue, it is the reasonableness of those fees.
Advanced planning and communication with your retirement plan participants can help ensure a smooth transition to the new ERISA fee disclosure regulations, and perhaps allow participants to become better informed about their plan’s fees – just as the regulations intended.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.