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401(k) fee disclosure is coming -- are you prepared?

408(b)(2) goes into effect Jan. 1

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The good

In the retirement world of today, the various plan designs, adviser classifications, types of providers, products and compensation structures come together to create a complex matrix of possible fee arrangements that many plan fiduciaries don't fully understand.

This is a problem because according to the Employee Retirement Income Security Act (ERISA), a plan fiduciary is obligated to understand this complicated matrix and ensure that only reasonable compensation is paid for services related to the plan.

This is compounded further when the issue of direct fees versus indirect fees is taken into consideration. A plan fiduciary may see and understand the direct fees associated with their plan, but if an indirect fee isn't disclosed, how can the plan fiduciary understand and thus make a prudent decision whether the fee is reasonable?

Much of the aim of 408(b)(2) is to require disclosure of both the direct, and especially the indirect, costs associated with administering certain types of qualified plans. A plan fiduciary must have full and correct information regarding plan fees and compensation paid to make a reasonable decision.

The proposed regulation applies to fees and compensation in conjunction with: ¥ fiduciary service providers;

¥ providers of banking, consulting, custodial, insurance, investment advisory or management, recordkeeping, securities brokerage or third party administration services; or

¥ providers who receive indirect compensation for accounting, actuarial, appraisal, auditing, legal or valuation services.

Among other things, the proposed disclosure requirements include that the contract must be written and most service providers must disclose all specific services to be performed, all specific compensation that will be received for each specific service respectively and show if the compensation is received directly or indirectly.

Service providers must also disclose all conflicts of interest to include: ¥ interest the service provider has in transactions entered into by the plan pursuant to the contract;

¥ material relationships with other parties that may create a conflict of interest;

¥ compensation the service provider can adjust or change without approval by a fiduciary; and

¥ procedures in place to address any potential conflicts of interest that may arise.

One requirement of the proposed regulations is that in order to comply with ERISA reporting and disclosure requirements, service providers must disclose compensation or related information concerning the contract that is requested by a plan fiduciary or plan administrator. If a plan fiduciary asks, the service provider must provide the information. This kind of "catch-all" provision always seems to get used in unique ways as people become more familiar with it, so the future should be interesting.

And finally, all the information, contracts, disclosures, fees, compensation and anything else requested within the scope of 408(b)(2) must be in language easily understood by the average plan participant. Another simple concept that is often unique in its application.

The (possible) bad

Another part of the proposed regulations deals with getting investment option fee disclosure information not just to plan fiduciaries, but to plan participants. Starting Jan. 1, participants must also get the full fee disclosure on their investment options just like plan fiduciaries.

This topic has raised enough controversy that one of the writers for PlanSponsor, Nevin Adams, conducted his own small survey of PlanSponsor readers in the September issue.

The most obvious, and perhaps foretelling, result of the survey was that nearly half the respondents (45.1 percent) hadn't even read the proposed regulations. A fact that resembles the overriding concern raised by many: Making more information available isn't always a good thing.

Overwhelmingly, the responses were in the less-than-positive to downright negative direction. Many seemed to feel that making all this new fee disclosure available to participants will only confuse them more, creating more "paralysis by analysis" than is already the bane of the retirement plan industry.

It is well known that currently, only a small percentage of plan participants use the information available to them and many are confused to the point of inaction. Will making more information available help or hurt the participants who aren't using the information currently available to them? Will this extra information confuse those that are actually using the information available to them to the point they join the ranks of those sitting on the sideline due to confusion?

Which leads to the question: How is this fee disclosure information going to be passed along to participants? The concept is that fee information will be included on participant statements. Very few providers currently provide this level of fee disclosure information, or have the technological capabilities to provide this information on participant statements.

The ugly

So what happens if a plan fiduciary and/or a service provider doesn't comply with the proposed regulations? The arrangement between the service provider and the plan becomes a prohibited transaction.

A plan fiduciary is entitled to a class exemption providing relief if the fiduciary enters into a contract that is not "reasonable" because, unknown to the plan fiduciary, the service provider failed to comply with its disclosure obligations.

In simple terms, if the service provider fails to disclose to the plan or the plan fiduciary the required disclosure information, the fiduciary is entitled to a refund of all associated service costs and additionally, the service provider is assessed a penalty excise tax.

If the plan fiduciary is aware of the non-disclosure (and does nothing to rectify the situation) and/or is involved in the non-disclosure in some way, the fiduciary could be liable for any losses attributable to the arrangement and/or transaction.

What it means

One thing is certain; service providers, advisers and plan fiduciaries are all going to be pushed to come up with new and innovative ways to educate participants on understanding plan fees. Whether the service providers and advisers see this as a necessary evil or an opportunity will be a deciding factor on which service providers and advisers get the business.

Sources: Principal Financial Group, Compliance News July 2008; Reish Luftman Reicher & Cohen, Advisor Report May 2008 and August 2008; US DOL EBSA, Fact Sheet December 2007; JP Morgan Chase & Co., JP Morgan Compensation and Benefit Strategies Jan. 30, 2008; Plansponsor, September 2008.


Peartree is a principal and director of Retirement Services at Barney & Barney LLC, a California-based company that provides a wide range of insurance and risk-management solutions.

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