Today, many employees are investing in their future through 401k plans— which often consist of a portion of an employee’s salary over time. Unfortunately, this nest egg is kept from reaching its true potential possibly due to high fees and hidden expenses in the plan.
As a plan sponsor, you are responsible for your participants’ nest egg—making you a fiduciary to the plan, whether or not you are named as one. The new Department of Labor ERISA 408(b)(2) regulations will impact plan sponsors more than services providers and will require an overhaul of plan sponsor approaches to many formerly routine fiduciary activities.
These new regulations will impact both retirement plan vendors and plan sponsors. Although the DOL emphasizes the impact that this will have on vendors—changes to their fee structures, disclosures, and accountability—plan sponsors are also acquiring significant changes to their fiduciary role and responsibility.
What does this mean for fiduciaries?
According to this new rule, plan sponsors have a fiduciary responsibility to ensure that your company’s plan fees are reasonable. In order to be considered reasonable, a covered service provider is required to provide certain fee disclosures in writing in advance of the contract. In addition to this, the regulation also requires that plan sponsors disclose to participants on a quarterly basis, the fees and expenses being charged to their 401(k) plan.
With this new rule in place, plan sponsors are now expected to not only ensure the receipt of their vendor’s reports, but also to prove that they reviewed the reports, decided on the adequacy of the reports and concluded that their vendor’s fees are reasonable—requiring an entirely new level of diligence, training and accountability.
Unfortunately, most plan sponsors lack the experience or resources to properly complete these requirements. They may have to rely heavily on a qualified independent 3rd party to review the disclosures, compare them to proper benchmarks, consider the value of services, and engage in a prudent process.
As overwhelming as this may seem to plan sponsors, the implementation of these proactive strategies is as much of an opportunity as it is a challenge. Evaluating the 408(b)(2) disclosures will help plan sponsors reach “reasoned and informed” decisions through Request For Proposals (RFPs) or Benchmarking—most likely resulting in savings of up to 25-50% in recordkeeping costs.
What does this mean for participants?
401(k) fees can have a dramatic impact on the size of your participants’ nest egg. With the implementation of 408(b)(2) regulations, not only will participants have complete disclosure (participants will now know exactly what they are paying for and what they are getting) but they will also have the potential for significant cost savings over time.
An employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent however, your account balance will only grow to $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent. Source: Department of Labor
How to prepare:
The are several different strategies to help plan sponsors fulfill their fiduciary obligations under 408(b)(2) fee disclosure rule.
1. The DIY Approach: This entails no use of outside fiduciary advisors, instead plan sponsors would rely solely on in-house leadership to understand, develop and properly execute a 408(b)(2) compliance strategy.
2. The Outsourced Approach: This completely entrusts fiduciary responsibility and liability to a qualified, independent third party.
3. The Blended Approach: This offers a compromise. This will fulfill most fiduciary responsibilities in-house, but engage an independent fiduciary advisor to review and assess fiduciary practices at least once per year.
Only two of these three strategies—the blended approach and the outsourced approach—provide holistic solutions for minimizing risk, ensuring compliance with 408(b)(2) and provide plan sponsors with peace of mind regarding their fiduciary responsibility.
Both the Outsourced and Blended Approach have one common link—a fiduciary audit. The implementation of an annual audit of vendor’s fees and arrangements can provide plan sponsors with the confidence and peace of mind they need to successfully move forward under the new regulations.
A fiduciary audit works to insulate plan sponsors from fiduciary liability. It also helps plan sponsors gain valuable insight regarding any management practices that should be adjusted, ensures that plan participants are being charged reasonable fees (maximizing their investment power) and helps identify vendors that are not acting in the best interest of the plan’s participants.
A fiduciary audit evaluates several key metrics of the plan sponsor role:
• The consistency of value delivered by the plan sponsor vendors
• The appearance of any vendor conflicts of interest and their potential
harmful effects on the plan or its participants
• The reasonableness of the covered service provider’s1 fees
• The effectiveness of the plan vendor’s practices
• The identification of any areas that fall below the standard as set by ERISA
The implementation of an annual audit of vendor’s fees and arrangements by a qualified, independent 3rd party will not only create tangible evidence that stands against any potential DOL investigation or allegation, but it can provide plan sponsors with the confidence they need to successfully move forward under the new regulations.