“Americans should be entitled to clear and complete information on the fees taken from their hard-earned retirement savings,” says U.S. Rep. George Miller, D-Calif.), Chairman of the House Education and Labor Committee. This thinking, along with two relatively recent events, will have an impact on how plan sponsors identify and communicate 401(k) plan fees to their participants.
First, regulations proposed by the Department of Labor (DOL) require comprehensive disclosures to 401(k) and other defined contribution (DC) plan participants regarding administrative and investment-related fees. Accordingly, there is increased fiduciary responsibility among plan sponsors regarding the monitoring and disclosure of plan fees and expenses to plan participants.
Next, the currently proposed 401(k) Fair Disclosure for Retirement Security Act (H.R. 1984) would amend ERISA to provide special reporting and disclosure rules for individual account plans. Among other requirements, the bill requires fee disclosure for all 401(k) investment options.
Are You Ready?
In order to be prepared for the requirements resulting from the above-mentioned legislation and regulation, plan sponsors should follow these recommendations:
- Identify the types of expenses a participant in the plan bears. These expenses might include:
- Investment Management Expenses: The fees associated with the management of the plan’s investments, including commingled funds, mutual funds and company-managed assets;
- Plan Administration: Includes the cost for recordkeeping, trustee, custody, communications, legal and audit, oversight of investment managers, and if applicable, investment advisory services; and
- Other Fees: Generally, the expenses or charges assessed against a particular participant relating to participant-initiated actions such as loans, distributions or qualified domestic relations orders should be disclosed at the time of the transaction.
- Disclose the fees/costs charged to participants as a percentage of assets and/or dollar amount. For example, investment management fees typically are based on asset size; however, plan Administration Fees might be assessed on a per-participant basis, asset size or some combination of the two.
- Plan expenses, helpful to participant decision-making, should be disclosed to participants at least on an annual basis.
Based on the above recommendations, how should a plan sponsor gather the information and prepare for the inevitable?
First, plan fiduciaries will have to work closely with recordkeepers and other providers to expand their communication capabilities with their participants, meet reporting obligations, and potentially revise contracts for plan services. The plan sponsor should identify the compensation received, both directly and indirectly, by the service providers.
Next, plan sponsors should work to develop effective participant communication methods. For example, plan sponsors could develop an annual notice outlining all the required fee disclosure information.
Finally, keep in mind that the purpose of all of the above regulatory and legislative efforts is to encourage participants and plan sponsors to focus on fees. As such, it is important for plan sponsors to periodically review plan fees and expenses very thoroughly, which includes:
- Ongoing monitoring to determine whether investment expenses are reasonable and appropriate, taking advantage of lower-cost vehicles, if appropriate;
- Effective governance policies for payment of expenses from plan assets, and the allocation of expenses among participants;
- Periodic marketplace comparisons, either through a vendor search or fee benchmarking;
- Documentation of any decision that the plan sponsor makes regarding the types of fees that are charged to the plan; and
- Re-evaluation of fee disclosure practices on a regular and ongoing basis.
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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.