Financial advisors serving 401(k) plans are required to comply with fee disclosure requirements under ERISA Section 408(b)(2). The requirements are intended to assist plan sponsors with fulfilling their ERISA fiduciary duty to monitor the plan’s services and fees and to ensure participants are not being charged excessive fees.
This has become especially important over the last several years, as litigation related to excessive participant fees has increased dramatically. Service providers have taken notice. Here are a few frequently-asked questions we have received from our clients that sponsor retirement plans:
How have plan sponsor fee disclosures changed the retirement plan industry?
There is a common misconception among plan participants that their retirement plan is free, since they do not see specific charges on plan statements. The 408(b)(2) plan fee disclosures have created opportunities to expand dialogue between plan sponsors and investment service providers and to create greater awareness of plan expenses and the factors that determine pricing. Terms such as monitoring, benchmarking, and revenue sharing are now part of regular discussions and overall, the focus on education has increased within the industry.
What is considered best practice in regards to fee benchmarking and monitoring?
Those charged with plan governance as plan trustees have a fiduciary obligation to act in the best interest of plan participants. All plan expenses should be monitored on a regular basis and the plan trustees should perform a formal analysis every two to three years to ensure their expenses are on par with similar-sized plans. The analysis should include reviewing third-party service agreements to ensure the proper services are being provided.
What is the most important question to ask your investment service providers?
“What is your required revenue to operate the plan?” is a critical question. But who asks the question is just as important as the question itself. The person doing the asking should be a qualified independent investment advisor. An investment advisor will have the adequate knowledge and background to negotiate fees, identify areas of concern, and ensure you are receiving the proper level of service.
How do I know when to get an investment advisor involved?
Engaging an independent investment advisor may seem too expensive for plan sponsors with less than $10 million in assets. It can also seem like overkill for larger plans that have extensive benefits and pension departments. However, unless you have a certified investment professional on staff, or acting as a plan trustee, you are leaving a lot to chance. Independent advisors can assist with meeting your fiduciary responsibility. More importantly, they will fill in gaps in your expertise in the investment arena. Accounting firms experienced in retirement plans can often recommend an independent advisor and should be able to discuss the review process surrounding plan fees.
When it comes to plan expenses, plan sponsors and fiduciaries need to be sure they are fulfilling their fiduciary responsibility to protect the best interests of plan participants and determine whether plan fees are reasonable.
Roman Leshak, Jr. can be reached at Email or 215.441.4600.
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