Avoid Prohibited Transactions

Plan sponsors are expected to act with the care, skill, prudence, and diligence of an expert when managing your company's retirement plan. Recently, the regulatory microscope has focused on the management of plan fees with fee disclosure requirements released in summer 2012.

“…if a plan sponsor fails to engage in a prudent process to evaluate disclosures…or fails to identify required disclosures that are missing or deficient and take affirmative action, it will have engaged in a breach of fiduciary duty and, possibly, a prohibited transaction.” (Reish, Fred. “ERISA Service Provider Disclosures: What Plan Sponsors Need to Do Now.” July 2012)

In this landmark package of regulation, the Department of Labor focused on both fees and service. The regulation required covered service providers (“vendors”) to disclose not only the fees they receive but also the services they provide to your 401(k) plan. As plan sponsor, it is your fiduciary responsibility to conduct an exercise to assess the “reasonableness” of each vendor's fees relative to the services they provide to your company, your plan, and your participants. This is a tall order given the variation in service levels from one vendor to the next. You may have a broker, for example, who hasn't been to your company since the plan was set up. Or you may have a broker who is on-site regularly to conduct one-on-one sessions with participants. In either case, the DOL holds you, as plan sponsor, responsible for evaluating the fees relative to services provided by your vendors and comparing that structure to the broader industry.

Your ERISA Responsibility for Plan Fees

The Department of Labor, under ERISA, requires fiduciaries to take the following steps:

  1. Ensure that all vendor fee disclosure documents are complete according to ERISA Section 408(b)(2).
  2. Determine whether your plan's fees are “reasonable” relative to the services received from vendors.
  3. Identify and address any potential conflicts of interest that exist.

Many plan sponsors may be ill equipped to complete these tasks. But the DOL has already stated that ignorance of the rules will not provide relief from the prohibited transaction consequence of noncompliance. It is a best practice to engage the support of an independent advisor or attorney with experience in this type of provider evaluation.

How Independent Benchmarking Can Help

Although your company's retirement plan committee might undertake the project of evaluating the reasonableness of fees without assistance from a qualified professional, courts tend to agree that it is a “best practice” to work with a knowledgeable, independent advisor.

With the results of the benchmarking exercise, you will be able to ensure that your plan fees are reasonable and that your vendor services are competitive. You'll be in a position to either negotiate fee reductions or additional services with your current vendor, or you will be prepared to develop new vendor relationships. A well-priced and well-serviced plan ultimately benefits plan participants and minimizes fiduciary liability risk for the employer.

How Align FSG Can Help With Independent Benchmarking

We offer three different benchmarking services, each designed to support your fiduciary responsibilities. We offer the following:

  • Fee disclosure compliance support: There is still a lot to learn about these new regulations. We will educate your investment committee on the requirements and the impact on their fiduciary responsibilities. We will also review your vendor disclosures for compliance and create a one-page summary of all plan fees.
  • Assessment for conflicts of interest and benchmarking: Independence is essential to fulfilling these two responsibilities. We find that many plan sponsors place a dangerously high level of trust in their current vendors for performing these services.
  • Participant communications and vendor negotiation: Many participants may have thought their 401(k) plan was “free.” As fee disclosure regulations continue to roll out, an effective participant communication strategy is essential to avoiding negative reactions. Also, we will prepare your investment committee to negotiate cost reductions and increased services from your vendors using the results of our benchmarking analysis.

For additional details on our benchmarking services and costs, please contact us. Also, for more information about fee disclosure, we invite you to view the following slideshow.



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