|Copyright:||(c) 2010 Mondaq, Source: The Financial Times Limited|
|Source:||Financial Times Limited|
Lawsuits alleging that 401(k) plan investment fees are too high and have not been monitored by plan fiduciaries or disclosed to participants have been in the spotlight for some time. Although plaintiffs have not been prevailing in this litigation, there is still the potential for such cases, or for
This Osler Update summarizes the new rules that have already become law and contains recommendations for best practices to help limit the risk of civil penalties and lawsuits.
Who is Affected
Any fiduciaries responsible for hiring plan service providers for defined contribution or defined benefit plans, such as a 401(k) Plan Committee, will be required to get mandatory fee disclosure from the plan’s service providers. If the plan doesn’t designate a fiduciary responsible for hiring, the default fiduciaries will be the Company and its board of directors. Service providers include record keepers, third party administrators, trustees, brokers and investment managers and advisers. The regulations even apply on a limited basis to managers of private equity funds, including many hedge funds, that are treated as holding plan assets under
A second setof regulations finalized in
The New Service Contract Requirements
Covered plan service providers must now prepare to provide a large amount of new information. The requirements generally include:
a description of all services provided to the plan and whether they will be provided as a fiduciary or registered investment adviser; all direct and indirect compensation that the service provider, any affiliate or subcontractor expects to receive; if the provider is an investment fiduciary, broker or record keeper, a description of any compensation such as
While the regulations do not technically apply where all plan fees – including indirect fees – are paid by the plan sponsor, it is difficult to believe that such plan sponsors will not require service providers to give them at least the same information as is legally required when fees are paid from plan assets.
Plan fiduciaries, such as 401(k) or pension plan committee members, also need to know these rules, since ERISA prohibits entering into service contracts with parties in interest unless the services are necessary and the arrangement and compensation are reasonable. The regulations take the position that an arrangement is not reasonable if this mandatory information has not been obtained. Fiduciaries must request information from the service providers if it is not provided in a timely manner, and report non-compliance to the
Participants are not required to receive the same disclosure about service provider fees as plan fiduciaries will receive (described above). Instead, all eligible employees will now have access to the following specific information:
1. On first qualifying to participate in the plan and on an annual basis thereafter:
For each available investment option, total operating expenses as a percentage and as a dollar amount for an assumed investment of
A model chart to disclose this information in comparative form was also released. Although similar formats are acceptable, the model will probably become the format used by almost all plans.
2. The following will be itemized for participants on a quarterly basis:
Fees actually deducted from their accounts for administration. Fees actually deducted from their accounts because of individual activity, such as because a loan or qualified domestic relations order was processed. Fees actually deducted from their accounts for investments e.g. loads and sales charges. While the rules do not require the details of revenue sharing arrangements to be disclosed to participants, if revenue sharing payments or
Each plan must have information available on a website giving participants access to supplemental information, such as portfolio turnover, and provide a glossary of investment terms or make a glossary available through a website link. In general, changes require at least 30 days advance notice.
No specific excise tax or monetary penalty is assessed for noncompliance with the participant disclosure rules. However, by issuing these regulations under Section 404(a) of ERISA, which defines fiduciary responsibilities, the
The service provider requirements apply in
Some Suggested Best Practices
Request fees as a percentage of plan assets as well as a dollar amount. Monitor asset-related fees on an ongoing basis to make sure they do not become disproportionate as assets increase. Request and review information about revenue sharing payments, including investments that generate those payments and those that do not and the cost of services if no offsets or rebates apply. Explore alternatives to revenue sharing. Place fee review on the Plan Committee’s agenda on a regular basis and document the results of that review. If you select an investment or a service provider with superior performance and higher fees, document your analysis carefully in the records. A prudent process is the best defense against charges of breach of fiduciary responsibility. Understand the alternatives to mutual funds that are available in the market, including bank collective trusts and insurance company separate accounts and the fee arrangements for each. Consider index funds, which typically have lower fees, as well as actively-managed funds. Request fee information about different classes of funds, and request a waiver of the minimum balance requirements and any loads. Amend plan service agreements to spell out disclosure responsibilities and a calendar for compliance. Consult outside advisers if more expertise in evaluating fees in relation to performance or selecting investment options is needed. Monitor case law and legislation for new developments expanding disclosure obligations. Footnotes
1. Which has proposed new general rules for
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.