Does anyone really believe the old adage that says what you don’t know can’t hurt you? If you do, it’s probably costing you money.
Take your organization’s retirement plan. If you’re an employer with a 401(k), 403(b) or other qualified retirement plan, it’s your fiduciary responsibility to exercise care and due diligence with regard to your plan, and to act solely in the interest of your its participating employees. That includes monitoring fees and other costs to ensure that they’re reasonable in relation to the services received.
Given the myriad of fees and terms associated with retirement plans, determining the cost has always been a complicated matter not well understood by most of us. As a result, you may not be fully aware of all the fees you’re paying.
For example, there is often a lag time between the date funds are withdrawn from a plan sponsor’s account and the date those contributions are deposited into the participants’ accounts. If this is true for your plan—and the plan’s custodian or other service provider collects the income these retirement funds earn during that float period–you’re actually paying an indirect fee. As with any direct fee, it reduces your participants’ account balances.
It turns out that many of the fees associated with 401(k), 403(b) and other qualified retirement plans are indirect, making them more difficult to understand and potentially leading to misconceptions, misinterpretations and a general lack of transparency.
Even when the fee is relatively small, it can have a major negative impact on retirement savings given the long time periods involved. In an example published on the U.S. Department of Labor (DOL) website, a one percent difference in fees can reduce an employee’s retirement savings by 28 percent, assuming the employee has a balance of $25,000 invested for 35 years at seven percent.
According to a recent Department of Labor study, the difference between what you think you pay and what you actually pay could be sizeable—and that’s a big deal in light of your fiduciary role.
Other recent studies report that while most employers believe their employees are well informed regarding the fees they pay, more than four in five employees aren’t even aware that they pay fees for their retirement plans! They either believe the plan is free or, if there are fees, their employers pay them.
To help you and your employees better understand the fees you pay for services provided to your retirement plan, the U.S. Department of Labor is taking steps to enhance transparency and provide a common frame of reference. It has issued new regulations governing fee disclosures for qualified retirement plans.
That means your fiduciary duty now also includes understanding the new DOL-mandated fee disclosure requirements and planning for their impact on your organization and its employees.
New Fee Disclosure Requirements for Qualified Retirement Plans
The Department of Labor has issued regulations that require service providers to inform plan fiduciaries of all of the fees paid by their plans. The intent is to ensure that you have the information you need to fulfill your fiduciary responsibility.
Additional DOL regulations require plan sponsors to disclose to participants the fees that participants have paid.
These new plan-level and participant-level reporting requirements are as follows:
Plan-Level Disclosures
Your plan’s service providers are required to disclose plan-level fees, in writing, to you as the plan’s sponsor. This requirement is also referred to as a 408(b)(2) disclosure, named for the section of the ERISA legislation under which it is issued.
Your service provider must describe the services it provides for your plan, as well as all forms of direct and indirect compensation that it and its affiliates and subcontractors receive for those services. If this information changes, the service provider must inform you as soon as possible, but no later than 60 days after it is made aware of the change.
The services to be disclosed include recordkeeping and accounting, fiduciary, legal, administrative, actuarial, appraisal, custodial, insurance, investment, consulting, and individual account plan services, among others.
Fees and other compensation to be disclosed include floats, as mentioned above, as well as a broad range of charges in the following categories: investment (product-related, management, and transfer), administrative and recordkeeping, participant education and advice, trustee/custodial, compliance, plan amendment, loan administration, startup/conversion, and service provider termination. Generally, they are asset-based, transaction-based, per-person, or flat-rate fees. Some are one-time, others are recurring.
The effective date for this new plan-level disclosure has recently been moved back to April 1, 2012. It applies to all contracts and agreements in place as of that date.
Participant-Level Disclosures
You are now required to explain to your employees the fees and expenses that they pay, directly or indirectly, to participate in your retirement plan.
The DOL has published a sample fee disclosure form for plan sponsors that you can download from the web in either a .pdf format or a .doc format. You can adapt the contents of the form as you find appropriate.
The regulations require that your initial disclosure to plan participants be made by the later of:
60 days after the first day of your first plan year beginning on or after November 1, 2011, and
60 days after April 1, 2012, the effective date of the plan-level disclosure requirement.
For calendar-year plans, this means your first disclosure to participating employees must be made by May 31, 2012-i.e., 60 days after April 1, 2012.
In many cases, the regulations also require quarterly reporting to plan participants–including for most 401(k) and 403(b) plans, plus certain profit sharing and money purchase plans. Governmental plans, SEPs, SIMPLE-IRAs, defined benefit plans and defined contribution plans without participant direction are excluded.
The quarterly disclosures must be made within 45 days of the end of the calendar quarter, which initially translates to August 14, 2012.
Actions That You Must Take as Plan Sponsor
Currently, most employers with qualified retirement plans are required to disclose the indirect fees they’ve paid to their plans’ service providers on Form 5500, Schedule C. It is important that you begin to document the fees and costs that you and your employees incur in connection with your retirement plan.
Next year, based on the plan-level disclosures you receive from your plan’s service provider, you have a fiduciary duty to determine if the service provider’s compensation is reasonable and that there are no potential conflicts of interest that may affect performance. Fulfilling this duty may involve comparing your current service provider’s cost structure with the cost structures of other service providers.
You have the right to reject the disclosure information you’re provided by your service provider if you find that it doesn’t include sufficient, readily understandable information.
Also next year, you’ll be required to inform your plan’s participants of the fees they pay to participate in the plan. It’s important to adequately plan for, and prepare your employees for, these disclosures. As surveys indicate that a majority of retirement plan participants are not aware of the fees they pay, the new disclosures have the potential to generate tough questions, anger some employees, or even erode trust in your organization if employees feel you haven’t been totally forthcoming in describing the terms of your plan.
If you need help in understanding or documenting the direct and indirect fees charged by your plan’s service provider, evaluating their reasonableness, reviewing alternatives, or reporting fees to your employees, give us a call. Our benefit plan professionals can help.
