For years, there have been concerns about the murkiness of various fees charged to retirement plans by their vendors -- and thus, the challenge for employers and employees is to make sure they know what they're paying. High fees can be a huge drag on long-term investment performance and the ability of employees to retire.  

As plan fiduciaries, employers have an obligation to ensure that employees aren't getting ripped off. More specifically, they need to demonstrate that they:

  • Exercise due diligence in choosing and evaluating their plan vendors on an ongoing basis, and
  • Have a rational foundation for the decisions they make.

Using vendors whose fees are on the high side of the spectrum does not necessarily indicate a failure to exercise fiduciary duty, as long as the fees are deemed "reasonable" for services rendered. For example, paying higher fees for a "Cadillac" service package would, presumably, be entirely reasonable if you made a conscious decision that type of plan is what your employees need and want. 

The new regulations with the July 1 compliance deadline are called the "plan level" disclosure rules (also called 408(b)(2) rules). After years of fits and starts, the final version of those rules was published by the Department of Labor (DOL) in February. Plan vendors have been gearing up to comply with the rules at least since 2010 when an "interim final" version was issued. Indeed, many employers have already received disclosures from vendors who decided not to wait to the last minute. Those employers should be reading the disclosures carefully, and preparing to answer questions from employees once employees receive their disclosures. 

Clear as Mud

The biggest area of murkiness in plan fees up until now has been revenue-sharing and "indirect compensation" arrangements between investment managers and other service providers. Thus the purpose of the new rules, according to the DOL, is to give plan fiduciaries enough information to spot (and evaluate the implications of) any such conflicts. The disclosures should also enable plans to "assess the reasonableness of total compensation, both direct and indirect, received by the covered service provider, its affiliates and/or subcontractors." (The DOL's summary of the 408(b)(2) regulations can be found here.)

Note of caution:  Employers cannot simply assume their vendors are providing them with all the information they need to carry out their fiduciary duties. This is important because employers that fail to obtain the information from the required disclosures could be deemed as parties to a "prohibited transaction," and subject to penalties and potential accusations of a fiduciary breach.

For these reasons, it is critically important that employers, either on their own or with the help of appropriate advisers, take affirmative steps to ensure they are making prudent plan vendor decisions based on all the facts. When it comes to evaluating the cost of plan services, employers and their advisers may want to take advantage of fee benchmarking services that are readily available.

Second Deadline: August 30th

Regarding the DOL's "participant-level" fee disclosure rules, also known as the 404(a)(5) regulations, employees will begin receiving regular rundowns on what they are paying -- although the detail won't be as exhaustive as what is required for the "plan level" disclosures.

As described in a recent report by Dalbar, a financial industry research organization, employees soon will "see how much they paid in fees and expenses... and this amount is not some complex formula or even a percentage but as dollars and cents that can be compared to their mortgage, rent, car payments or what they spend on vacation." That information may arrive accompanied by their quarterly 401(k) investment statements.

The added clarity is good, but even employers that have addressed all of the fiduciary implications of the plan-level disclosures must be prepared to answer any employee questions that arise as a result of the new fee information they will soon receive.

© Bizactions LLC.