Retirement Plan Decisions: Services, Fiduciaries, Fees, Expenses

A timely topic that has recently caught my attention relates to the new regulations that are being placed on service providers and fiduciaries of 401(k) and other qualified retirement plans. Although requirements have always existed under the Employee Retirement Income Act of 1974 (ERISA), these new disclosure rules have been put into place to make the fees and expenses more transparent for fiduciaries and participants in 401(k) type retirement plans.

The first effective date is in July 2011; therefore, business leaders must address this subject very soon, especially considering the significant investment made in employees and the risk an organization carries should it fail to select a fiduciary.

On the other hand, this situation presents a great opportunity to potentially lower the costs associated with investment advisory—a likely byproduct of increased transparency and disclosure.

If you aren’t familiar with this topic, read an article we published in September 2010, which covers the types of plans affected and the terms of the new regulations. A couple of colleagues in our firm’s employee benefits and wealth advisory groups explained the federal changes to me as follows:

When selecting and monitoring service providers and plan investments, ERISA requires plan fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries. Responsible plan fiduciaries must also ensure that arrangements with their service providers are “reasonable” and that only “reasonable” compensation is paid for services. Fundamental to the ability of fiduciaries to discharge these obligations is obtaining information sufficient to enable them to make informed decisions about services, the costs, and the service providers.

In recent years, the way services are provided to employee benefit plans and the way service providers are compensated (e.g., through revenue sharing and other arrangements) has become increasingly complex.

The Department of Labor (DOL) issued new regulations, referred to as the 408(b)(2) rules, which require registered representatives, investment advisers, and others working with plan sponsors to provide detailed overviews of their services and compensation, as well as declare whether they are acting as fiduciaries. Sponsors are required to meet these new rules by July 16, 2011.

The regulations formalize that investment professionals must acknowledge in writing if they’re fiduciaries of the plan and fully disclose their compensation. This information has generally not been available to plan sponsors and will require they re-evaluate their existing service providers to determine if there are better options available as required to meet their fiduciary responsibilities established by ERISA.

Please get in touch with your benefits coordinators to assure you are in compliance by the deadline. They’ll help you understand the fiduciary responsibility under ERISA and the risk a business may have related to your plan.

When evaluating service providers of ERISA employee benefits, consider:

• How your defined contribution retirement plan’s investments have done over the past few years. Compare investment returns and expenses to your peers.
• What you’re paying for the plan’s administrative fees.

Let’s talk if you’re unclear about the new retirement plan fee disclosure regulations and what that means to your organization.