New Tools Help Plan Sponsors Fulfill Fiduciary Duty
The 401k plan is the only retirement plan for over 40 million workers and is an essential benefit for many small and mid-sized companies. As the sponsor of a 401k retirement plan, these companies are helping their workers achieve a secure and dignified retirement. However, sponsoring a 401k plan also means that the plan sponsor fiduciaries are responsible for making important decisions about the management of the 401k plan including the obligation that they evaluate and understand plan fees and expenses.
According to the Department of Labor, "The Federal law governing private-sector retirement plans, the Employee Retirement Income Security Act (ERISA), requires that those responsible for managing retirement plans -- referred to as fiduciaries -- carry out their responsibilities prudently and solely in the interest of the plan's participants and beneficiaries. Among other duties, fiduciaries have a responsibility to ensure that the services provided to their plan are necessary and that the cost of those services is reasonable."
"When dealing with the financial future of America's workforce, it is critically important for fiduciaries to know the facts about fees, costs and other expenses within their plans," says Matthew D. Hutcheson, founder of Matthew D. Hutcheson, LLC, a Portland, OR, independent ERISA fiduciary firm.
One of the big dilemmas that plan sponsor fiduciaries have is just gathering and understanding all the fee and expense information related to their 401k plan. It seems like the retirement industry makes it hard to get a handle on the data, but two recent tools have been made available to that should greatly help overcome the problem.
The first is a recent publication (May 2004) by the U.S. Department of Labor called "Understanding Retirement Plan Fees and Expenses." This free publication (www.dol.gov/ebsa/pdf/undrstndgrtrmnt.pdf) will give fiduciaries a good fundamental overview of plan fees and expenses. The publication covers topics that include:
- What are the types of plan fees and who pays for them?
- What fees are associated with the investment choices in my retirement plan?
- What other factors might have an impact on the fees and expenses of my retirement plan?
- What steps can I take to evaluate plan fees and expenses?
The second tool is a disclosure form called the "Intermediary and Service Provider Annual Disclosure Statement" that plan sponsor fiduciaries can use to gather fee and expense information from those who provide services to their plan. This form (www.401khelpcenter.com/pdf/Annual_Disclosure_Form.pdf) was developed and released by the Revere Coalition (Coalition), a consortium of independent fee-only retirement plan consulting firms.
"The form's purpose is to allow plan sponsor fiduciaries to obtain the required disclosures from retirement plan service providers (i.e. investment advisors, recordkeepers, ERISA attorneys, consultants, custodians, auditors, etc.) about their compensation and potential conflicts-of-interest in order to allow plan sponsors to fully evaluate their service value and make informed decisions as fiduciaries," says Chip Moore of Pacific Portfolio Consulting, a Seattle, WA.
The form "is unique in that it clearly delineates how and from what source all parties are getting compensated, a fact that is required of all fiduciaries to know," according to Sean Waters, CFA, AIF® of Denver, CO, based Cook Street Consulting, a Coalition member.
In using the form, the Coalition suggests that a plan sponsor have each retirement plan service providers complete and sign the form annually. The responses should be thoroughly reviewed and the review process, along with any action taken as a result of the review, documented. Some plan sponsors may wish to engage an independent (one not associated with any of the current providers), experienced, fee-only, co-fiduciary to help decipher the responses and make suggestions about appropriate solutions to correct problems.
It is important to remember that plan fees and expenses are not just those paid directly by the plan sponsor or participants, but also include any revenue sharing or payments made between plan providers. "Generally, you want clear and definite statements about all types of remuneration flowing from various parties to others parties. You should be able to tell from the responses collected about conflicts of interests and other areas that call for corrections in contracts, further disclosures and recapture payments," advises Steve Lansing, CLU, CIMC, CEBS, of Sentinel Fiduciary Services, an Orlando, FL, based Coalition member.
"Plan sponsors should be looking for any payments or structures that create a direct or indirect conflict of interest or that are not in the best interest of the plan participants or beneficiaries," notes Waters. "I know of no other document that accomplishes this critical task."
If plan sponsor fiduciaries will utilize these two tools, they will have gone a long way towards solving the dilemmas of gathering and understanding the true expenses related to their 401k retirement plan.
Rick Meigs, President, 401khelpcenter.com
Click here for additional tools and information on plan fees.
