Like so many things, in benefits and in life, there are two sides to every coin. For example, while new 408(b)(2) regulations governing service-fee disclosures are expected to help retirement plan sponsors determine fee reasonableness and assess conflicts, once the July 1 deadline passed, the burden of responsibility shifted to the employer.
As of July 2, plan sponsors are required to collect and review disclosures from all covered service providers that have and have not provided the required disclosures. Covered service providers must report whether they are a fiduciary, the services they will render for the plan and the fees they will receive - both direct and indirect - and the manner in which they receive their compensation.
When providers report indirect fees such as revenue sharing, they must describe the compensation received, service provided for indirect fees, the payer of the indirect compensation and the nature of the arrangement between the payer of indirect compensation and the provider.
Leaving no stone unturned, plan sponsors should "get disclosures from all parties involved with running a 401(k)," explains Jason Frain, vice president of 401(k) product management and development for retirement solutions at The Guardian Life Insurance Company of America. Sponsors need to evaluate the service from their plan recordkeeper, investment adviser, third-party administrator or financial professional.
"These regulations make it a responsibility of the plan fiduciary to collect information about all the services provided by, and all the compensation paid to, the service provider, so the fiduciary can get a global sense of whether the service provider is receiving, in total, reasonable compensation for the services provided," adds Brian M. Pinheiro, a partner and practice leader in the employee benefits and executive compensation group at Ballard Spahr LLP.
Still, despite the added responsibility and liability placed on sponsors, "hopefully, the potential positive outcome from fee disclosure regulations will be a more collaborative environment between providers and plan sponsors, which facilitates discussion regarding overall retirement outcomes and solutions, participants' readiness to meet their retirement income goals, and plan services and plan design support that ensure that outcome," says Charlie Nelson, president of Great-West Retirement Services.
Convene a committee
As a best practice, fiduciaries should "form a committee that meets periodically and reviews the performance and fees of the 401(k) plan," says Pinheiro. He suggests the committee meet either quarterly or semi-annually, depending on the size of the plan.
Sponsors should adopt committee policies and procedures for reviewing service providers and go through a checklist to make sure they received all required disclosures.
Understanding that "it's hard to do an evaluation in a vacuum," Larry Goldbrum, general counsel at Spark Institute, says, "that's where benchmarking information will help plan sponsors see how the value of [the plan] and fees their plan pays compare to plans of similar size."
"Benchmarking is the new normal," concurs David J. Witz, managing director for FRA/PlanTools. "It is a process that can also help sponsors negotiate better pricing from their current provider in some cases."
In terms of timing, Robyn Credico, defined contribution practice leader for North America at Towers Watson, advises sponsors to "benchmark fees every two or three years, and do a real vendor search every five to seven years. [That] would be our best practice recommendation."
Eliminate conflicts of interest
In addition to evaluating the reasonableness of fees for service, plan sponsors must identify and remove any potential conflict of interests that might affect the quality of services they are receiving.
Sponsors need to ask whether anyone providing a service to the plan is related to anyone in the company; if there is an incestuous relationship between an owner/fiduciary and a provider, it could poison the plan by creating a conflict of interest and a separate prohibited transaction.
If incorrect reporting occurs, sponsors are protected under the "good faith reliance" standard if they were not aware of the error. If a service provider becomes aware of an error in the disclosure, they have 30 days to notify the sponsor.
Often, providers will certify their fee disclosures with a third party "so that a plan sponsor can feel confident that the service provider is meeting the plan sponsor's obligations," explains Nelson.
"The issue in the future for plan sponsors is they will have to go through a deliberative process to select their covered service provider, in particular their adviser. I think advisers will become invaluable to plan sponsors in the future to protect them, but they need to make sure they hire a qualified adviser," Witz asserts. "Right now, the qualification standards for the industry are very minimal. It requires more education, training and certification to cut hair in the state of North Carolina than to become an investment adviser."
These regulations, he believes, help sponsors transparently check on their advisers' abilities.
Credico agrees: "For those who have not been paying attention, it will be an eye opener," adding that the disclosures should improve the industry relationships. "I think it's in the plan sponsors' best interest to know what they are paying and what they are getting and allow them to make informed decisions."
What the future holds
Whether the new regulations will drastically change the compensation landscape remains to be seen.
Witz forecasts "that more commission-based advisers will gravitate toward a fee-based business structure and become either an investment adviser representative of an RIA [registered investment adviser] or set up their own RIA."
Written agreements with transparent fees and obligations will eliminate nonfiduciary advisers that provide no meaningful services to a plan. Receiving compensation indefinitely for selling a plan is no longer acceptable. Thus, Witz adds, "in the future, it will be very difficult for an adviser to claim they are not a fiduciary."
Despite the added scrutiny and responsibility as a result of the regulations, Frain doesn't "see the role of the broker or the commission-based adviser going away anytime soon. It's been an important part of marketplace and will continue to be so."
He adds that the rules actually make fiduciaries' jobs easier. "Transparency is a good thing for this industry and the plan sponsor; it will allow the plan sponsor to fulfill their obligation more easily than they have in the past," he says. "Now the plan sponsor will easily get information because it will be pushed to them, and [they will] be forced to review it and make sure their 401(k) is operating smoothly."
Fee disclosure regulations: The nuts and bolts
While the new regulations place the responsibility for fee disclosure on service providers, if the disclosures are not received by July 1, plan sponsors are obligated to ask for the information in writing.
Providers then have 90 days after the letter is sent to disclose fees. If fees are not disclosed by that time, fees paid but not disclosed are deemed "unreasonable" and must be returned.
Plan sponsors are required to report to the Department of Labor providers that fail to meet disclosure requirements within 30 days following the 90th day. DOL has provided a website for ease and efficiency of reporting providers (http://www.dol.gov/ebsa/regs/feedisclosurefailurenotice.html). The initial letter requesting disclosures is proof the fiduciary met their responsibility.
"By the middle of November, the DOL should have a number of prospects to go after for receiving unreasonable compensation and engaging in a prohibited transaction," says David J. Witz, managing director for FRA/PlanTools. "The plan sponsor that does nothing to obtain fee disclosures can become a party to the prohibited transaction and become equally liable for monetary damages."
Sponsors could be liable for monetary damages if they are stagnant in their duties as fiduciaries. However, says Robyn Credico, defined contribution practice leader for North America at Towers Watson, "for large employers, this is unlikely to happen because most vendors are ready to report."
Going forward, sponsors need to record information for renewing an engagement, starting a new engagement or extending an engagement with a provider in advance. The sponsor should be meticulous in ensuring the fees are reasonable and that there are no conflicts.
Advises Larry Goldbrum, general counsel at Spark Institute: "They shouldn't just take [the information] they get, throw it in a drawer and assume they have everything they need to make their decisions. They really need to go through a thoughtful process."
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