On August 30th, employees at many East Tennessee businesses will be predicting how the Vols will fare on the field against NC State at the Georgia Dome the following night. In addition to forecasting the season’s success, many will also be talking about the fees they are paying on their retirement plan accounts. This day marks a deadline for employers to disclose the cost of exactly how much all employer-sponsored retirement plan fees to employees, as part of the evolving U.S. Department of Labor Employee Retirement Income Security Act (ERISA). Prior to that deadline, retirement plan providers were required to notify employers how much is being charged for managing employee retirement plans by July 1, 2012.
Fee disclosure 404(a) 5, nicknamed “The Plan Participant’s Bill of Rights”, was created to assist employees in making informed investment decisions. Employers will be required to provide detailed fee information that specifies actual dollar amounts being charged for plan administration, recordkeeping and investment management to each employee’s account. Seeing their share of the administrative fees and investment expenses will no doubt create many questions. It’s important to note that these fees are not new. They’ve existed but were historically bundled up in the expense ratios of the investment offerings, not shown as specific dollar amounts.
These new fee disclosure rules will pull back the curtain on any hidden or indirect costs and also require vendors to clarify if they will bill for their services have their compensation deducted from plan assets. Mutual fund expenses such as 12b-1 and sub TA fees, as well as other participant billed expenses must be disclosed. Most importantly, investment advisers, administrators and all other involved parties must clarify if they are acting as a fiduciary to the plan.
As a plan sponsor of retirement plan, a business owner has certain fiduciary responsibilities that cannot be ignored. Those responsibilities include acting solely in the interest of the plan participants, making consistent decisions when diversifying plan assets, demonstrating prudence in decision making to the plan, and documenting all of those efforts.
It’s also the plan sponsor’s responsibility to understand plan fees and ensure that they are reasonable. This process is best achieved through benchmarking. In order to determine how reasonable fees are, it’s important to understand how the marketplace is priced relative to factors such as services provided, plan performance, plan size and demographics. As a fiduciary, it’s imperative that you document a prudent process in determining the reasonableness of fees and how you went about the decision making process.
The key to a prudent process is to evaluate and compare plan fees and services to other similar plans. If done properly, benchmarking can help plan sponsors understand their plan’s fees to ensure they’re getting what they are paying for. After the end of August, employers and employees will know how much they are paying and who they are paying for retirement plan services.
These rule changes provide dramatic clarity in what’s been a historically vague and confusing industry. Fee disclosure allows retirement plan sponsors to better understand what they are paying for, and allows them to focus on what’s primarily important ; improving retirement outcomes for their employees.