The Silver Lining of 401(k) Fee Disclosures
By Jonathan Anderson
In all of the recent – and perhaps herculean – efforts to develop and distribute fee disclosures, a proverbial “silver lining” actually exists.
Service providers have spent much time, effort, and expense (sometimes great) in complying with the Department of Labor’s service provider fee disclosures, effective July 1, 2012.
I also realize that service providers and employers, now focused on providing participants with the participant fee disclosures, generally effective August 30, 2012, are expending similar time, effort, and money it took for the service provider disclosures.
I further recognize the disclosures contain some additional fiduciary obligations that could be challenging (e.g. reporting to the DOL any service providers with deficient disclosures; possibly being penalized and/or sued for breaches of fiduciary duty; et cetera).
However, there is a silver lining surrounding the valuable and critical benefits resulting from the disclosures.
Service Provider Disclosures:
One of the first benefits is that plan fiduciaries now have a more compact and precise tool to help determine the actual services provided by a vendor, and the reasonableness of the fees for such, to a plan.
Since determining the reasonableness of the services and fees under a service provider arrangement has always been a requirement of the fiduciaries (to avoid a prohibited transaction), the disclosures should simplify what had been a complex process for most fiduciaries. For other fiduciaries, perhaps this will be the first time a formal determination of an arrangement’s reasonableness has actually been made.
With the new disclosure, the determination process has been made easier for the plan fiduciaries, and can allow them to make more informed decisions.
The same benefit applies with respect to documenting the process of determining of an arrangement’s reasonableness. By having a disclosure describing and summarizing the services, fees, and the parties providing the services and receiving the fees, the fiduciaries’ documentation process has been simplified. In addition, documenting the process could aid the plan sponsor/plan fiduciaries defend any legal claim that the services and fees were not reasonable.
Another benefit is that the disclosures allow fiduciaries to use more of an “apples-to-apples” comparison of one service provider’s services and fees to another service provider’s services and fees. Comparisons may be used to further justify staying with the current service provider, or to explore whether switching to a different provider might be better.
Yet another benefit is the disclosures allow fiduciaries to help identify whether any changes to the current arrangement should be explored and/or made. For instance, after reviewing the disclosures made about the investment alternatives in the required summary chart format, perhaps the plan fiduciaries may decide to add or modify the investment alternatives from which a participant may choose to invest his/her account balances.