The Facts About ERISA Section 408(b)2 and Amendments to Section 404(a)
There has been a lot of confusion regarding the changes to the ERISA regulations for 401k plans that both plan providers and plan sponsors will need to comply with beginning in 2012.
The purpose of the new rules is to provide transparency of fees for both plan sponsors and plan participants. The reason for the new rules is that many plan providers haven’t taken the high road when it comes to fee disclosure. As a matter of fact, the true cost to plan sponsors and plan participants will be much higher than most people think.
In this blog we will attempt to give you the big picture of the changes and how that will affect all of the parties involved.
New ERISA Regulation Section 408(b)2
What Does the New Rule Mean for Service Providers?
Service Providers Must:
- Describe the services they provide
- Determine if they are providing fiduciary services as defined by the Investment Advisors Act of 1940 or similar state laws
- Determine what compensation is being received and how it is being received
- Provide additional disclosures for investment services
The way things are now service providers are unclear as to what capacity they are serving their clients. Are they simply serving the plan in an administrative capacity, or are they offering investment advice and serving as plan fiduciaries? Why is this important? This is important because a plan fiduciary has a much greater legal responsibility with respect to the plan’s compliance with the all of the laws governing retirement plans. A plan fiduciary also has to put the interest of plan participants ahead of its own interests, which is not always the case in the 401k plan provider/plan sponsor relationship.
Modification to ERISA Regulation Section 404(a)
What Do the Rule Modifications Mean for Plan Sponsors?
Plan Sponsors Must:
- Must provide sufficient information regarding the plan and the plan’s investment options, including fee and expense information
- Must provide to each participant or beneficiary certain plan-related information and certain investment-related information
Many plan sponsors are not taking their fiduciary responsibilities seriously or are just neglecting their duties. In order to fulfill their fiduciary responsibilities plan sponsors should be periodically reviewing the plans investment options. This would include investment choices, performance and expenses. Setting up a plan with a dozen or so investments and then letting the plan run itself is not a periodic review, nor is delegating that task to someone else to do the review if you don’t have documentation in your files to back it up.
The Disclosures to Plan Sponsors
Who is a service provider?
- Anyone receiving $1,000 or more in direct or indirect compensation for whatever reason
What must be disclosed?
- The plan provider must disclose in writing what service is being provided and how much it costs in dollars, a formula or in percentages for that service
When must the disclosure be made?
- April 1st 2012
- Subsequent disclosures must be made when plan a plan renews or makes changes or previously undisclosed fees are discovered by the service provider due to changes within the plan
The structure of compensation for 401k plans is very complex and usually multi-layered. By creating this law, the goal is to have all of the parties involved make a declaration stating what capacity they are serving the plan and make the nature of the relationship clearer for the plan sponsor. I guess it’s always good to know if there’s a fox in the hen house!
We are weary of the fact that companies can choose to disclose their fee structure in formulas. We have no doubt that Albert Einstein would have had trouble figuring out what we are likely to see when a company decides use the formula method of fee disclosure!
Disclosures to Plan Participants
Who must make the disclosure?
- The plan sponsor must make the disclosure to all plan-eligible employees and beneficiaries with account balances
What must be disclosed?
- Plan information
- Investment Information
- Charges deducted from participant accounts
When must the disclosure be made?
- May 31st 2012
- Annually thereafter
In our opinion this single aspect of the new regulations is going to be a game changer for the 401k industry. A combination of complex, often hidden fees offered by plan providers and a blind eye to fiduciary responsibility by plan sponsors will change dramatically, as plan sponsors and employees go from uninformed about plan fees and services to transparency.
We want to elaborate on what must be disclosed to participants because we feel that this is one of the most important parts of the new disclosure.
Plan Information
- A listing of plan investments
- Information about directing investments
- Plan Level administrative charges
- Individual participant charges
Investment Information
- Investment results
- Comparisons to relevant benchmarks
- Investment fees and expenses
- A website reference for information
Charges deducted from participant accounts
- All fees assessed against participant accounts in dollars
- Shared by participants
- Paid individually
One of the best parts about this is the fact that the disclosure of fees deducted from participant accounts must be made in dollars. That is huge in terms of transparency. Not everyone can decipher a formula, but everyone can understand what it means when someone is deducting money from your account.
Conclusion
401k plan sponsors are will be better served if they have a business relationship with an Investment Manager who will serve as a fiduciary of their 401k and is working under Section 3(38) and/or Section 3(21) of ERISA. Why? Because the nature of the relationship is clear. The fiduciary is working for the plan and nobody else, which eliminates the conflicts of interest regarding compensation. A fiduciary for hire will also be well versed in the latest developments in regulation investments and changes within the 401k industry, whereas most fiduciaries serving plan sponsors have an integral part in trying to run a business.
