Fees are on the agenda at the Department of Labor (DOL) these days. The DOL has been studying the issue for years but now they are more serious than ever. New regulations will go into effect next year that will require you to understand the fees and expenses your plan pays – and exactly who is getting paid.
Recently, the AARP did a study that showed that 71% of plan participants believed they did not pay any fees, or did not know what they paid. We all know that the “free 401(k)” is a myth. Unfortunately, in a 2009 study by Transamerica, 73% of plan sponsors said that their employees had a clear understanding of plan fees. Clearly there is a disconnect here. Beginning next year, the DOL’s new regulations make it a breach of fiduciary duty if you aren’t reviewing the fees and they are not reasonable.
Next year all service providers to retirement plans will be required to disclose all fees they are receiving – both direct and indirect fees. The disclosure will also spell out the services being provided and the service provider’s status as a fiduciary (or not) to the plan. Most service providers, brokers, and Investment Advisors are now busy modifying their systems so that they can provide these disclosures periodically. In addition, approximately 60 days after plan sponsors get these disclosures, new disclosure requirements are mandated for your plan participants.
So, as a plan sponsor what should you do? We have three tips to help handle these new regulations, including:
#1: Take These New Regulations Seriously
A fiduciary breach is something that poses a risk for both your company and personally.
#2: Review the New Disclosures As Soon As They Are Received
The DOL is not necessarily looking for plans to get the “best” deal on plan fees – but, the fees need to be reasonable taking into account the services provided. Different vendors provide different types and levels of service. If your vendor provides enrollment, consulting, tax return preparation, and recordkeeping services, the fees will obviously be higher than a provider that performs only one function. If you find a service provider is receiving compensation but providing no value, you need to review why they are getting paid, and perhaps cease the payment. Attached is a visual that you may find helpful in understanding the fiduciary duties for a retirement plan sponsor. (PDF download).
Recently several companies have entered the plan consulting market to provide benchmarking services for retirement plan fees- this may be worth considering depending on the complexity of your plan. The results of the benchmarks still need to be evaluated since they may not be able to take into account the quality of the services provided. If you do engage one of these firms and discover that your fees are not reasonable you will need to consider a change – or a renegotiation of the fees. At a minimum, you should meet with the vendor and find out how they justify their fees.
#3. If You Need Help, Get Help
The volume of information you get may be very substantial. You should get information on hard dollar fees, management fees, distribution fees, advisory fees, solicitors fees, commissions, expense ratios and more. For someone who does not deal with 401(k) plans every day it may be next to impossible to know if each of these fees is reasonable.
Finally, though these regulations do need to be taken seriously, we believe you will have some time to evaluate and respond to these new regulations. The DOL knows that it will take some time (a “reasonable” amount of time?) to react to this information. That being said, at a minimum, you should meet with the other responsible fiduciaries at your company and document a review of the information you receive – in writing for you files.
This article was provided by Sentinel Benefits & Financial Group, a sponsor of the CFO RoundTable. Sentinel Benefits & Financial Group is a full service employee benefits consulting and administration firm. For more information, please visit www.sentinelgroup.com.