Published:
Thursday, June 30, 2011
New fee and expense rules for retirement plans
By Lars Landrie
Moss Adams Wealth Advisors LLC
Did you know your company-sponsored retirement plan might soon trigger an automatic excise tax? If it's not compliant with new fee disclosure rules set to take effect on Jan. 1, 2012, it will.
“The rules governing every 401(k) and every private pension plan in the United States are going to change,” Bradley P. Campbell, former assistant secretary of labor for employee benefits, said recently in reference to the changes in ERISA regulation 408(b)(2) made by the Department of Labor's Employee Benefits Security Administration. This final rule is intended to help American workers better manage and invest the money they contribute to their 401(k) plans while ensuring they have access to necessary information about plan management fees and expenses needed to make informed decisions.
The change also requires that investment-related information is delivered in a format that enables workers to meaningfully compare investment options within their retirement plans. The plan fiduciaries will be able to use standard methodologies when calculating and disclosing expense and return information to achieve uniformity across the spectrum of available investments. This will facilitate an “apples-to-apples” comparison among a plan's investment options while providing a new level of fee and expense transparency for participants.
Current regulations afford plan service providers (investment advisors, administrators, etc.) an exemption from causing a “prohibited transaction” as long as their services are considered reasonable. Now the Department of Labor is adding an additional condition to this regulation that will force service providers to offer clear and detailed information of all the fees charged for services to a given retirement plan. Below are a few examples (not a full list) of what will need to be disclosed:
• Whether a service provider is an ERISA fiduciary or a registered investment advisory;
• A description of how the service providers will be compensated;
• A description of any compensation exchanged among related parties (such as within a bundled services arrangement) that is transaction based or charged against a plan's investments and reflected in its net value; and
• A description of the indirect payments that the service providers, affiliates and subcontractors expect to receive in connection with the arrangement.
What does this mean for you as a plan sponsor? As a plan fiduciary, the onus is on you to ensure all of your service providers comply with these new fee disclosure rules and that you have any related documentation on file. Also, and more importantly, you should have a process in place to determine if these fees are indeed reasonable given the level of service provided and what the marketplace bears. Remember, a plan fiduciary must engage in a prudent process when selecting service providers to ensure the plan is paying reasonable compensation for services. However, this does not mean that the cheapest service provider must be selected.
Lars Landrie has been helping closely held business owners and high net worth individuals develop their financial plans, manage their assets, and achieve their investment goals since 1993. He can be reached at 425-303-3032 or lars.landrie@mossadams.com.
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