April 1 deadline for 401(k) plans is no April Fool’s joke

Anthony Kippins, President, Retirement Plan Advisors LLC

If you’re an employer who sponsors a 401(k) plan, April 1 is a date that you should circle on your 2012 calendar. This is the deadline for plan sponsors to obtain from plan advisors newly required disclosures stating specifically what services they’re providing and the cost of each.

To some sponsoring employers, this may sound like a bureaucratic requirement of little consequence. This is decidedly not the case. Beginning April 2, plan sponsors who can’t show that they met the April 1 deadline for disclosures — and the best way to do so is to get them in writing, with signatures — will be subject to federal fines, disqualification of their plans and employee lawsuits aimed at their personal assets. 

This requirement is among many stemming from new rules from the Department of Labor (DOL) that go into effect in 2012. The intent of the rules is to protect participating employees from unreasonable service provider fees that shrink their 401(k) accounts. Unbeknownst to employees and many plan sponsors, many plans have long been charged excessive fees. Until now, disclosure of all fees has not been expressly required by federal rules. 

In addition to obtaining the fee and service disclosures, the new rules also require sponsors to determine whether plan advisors are fiduciaries — a legal/regulatory status meaning that these advisors always put clients’ interests ahead of their own. (See “The 401(k) regulatory tsunami.”)

The combined content of the new advisor disclosures will have profound implications for sponsors’ compliance burdens stemming from new DOL rules, which expand or amplify longstanding requirements of the Employee Retirement Income Security Act (ERISA) of 1974. 

Under ERISA, plan sponsors are themselves fiduciaries, with all of the attendant responsibility, accountability and liability. Many plan sponsors have always believed that their long-time advisors are fiduciaries, but this simply isn’t true. Typically, the dominant advisory role in a 401(k) plan is played by a broker, yet precious few brokers are fiduciaries. 

Though ERISA rules prohibit non-fiduciaries from advising on the suitability of specific investments in these plans, enforcement over the years has been lax, allowing many brokers to cross the line between providing employee education and actually advising on the suitability of specific investment options.

Thus, they’ve engaged in the quintessential advisory role — one reserved by law for conflict-free fiduciaries who can share legal responsibilities with sponsors. By contrast, brokers may have conflicts of interest, such as business relationships with financial institutions that provide investments for the plan.  

It is critical for plan sponsors to understand how the dynamics of these disclosures will put an increased regulatory and legal burden on them as fiduciaries: By making it a matter of record whether an advisor is or isn’t a fiduciary, the new DOL rules mean that sponsors will have no credibility in telling regulators that they believed they were outsourcing their own fiduciary responsibilities.

In many cases, details of the new advisor disclosures will trigger epiphanies for sponsors concerning fundamental inadequacies of their plans, bringing a growing awareness of some of the rigors that they must undergo to assure that these plans comply with the new DOL rules.

From the point of view of plan sponsors using a broker to service their plans, this epiphanic moment will often go something like this:

– The sponsor, aware of the importance of these disclosures, does some research and learns what services non-fiduciary advisors can and cannot legally provide.

– In disclosures from the broker, the advisor lists the fees that his or her company is charging and the services provided for these fees: selecting mutual funds for the plan’s investment options, making educational presentations to employees and enrolling them in the plan.

– The broker states unequivocally that he or she is not a fiduciary.

– The sponsor realizes that because plan-education presentations typically involve answering questions about specific investments, they can easily involve advisors’ rendering advice on investments — an activity prohibited for non-fiduciaries.

– Further, the sponsor realizes that this advisory scenario is even more likely at enrollment meetings.

– It dawns on the sponsor: The plan is getting far less actual service than previously believed. Hence, fees for the actual, legitimate services being provided are far higher than the sponsor thought.   

These disclosures are intended to serve as a wake-up call for companies who may be paying far too much for far too little, so they can take steps to change their plans.

When doing so, sponsors should be careful not to make the same mistakes that got them into trouble in the first place. When non-fiduciary advisors pitched them business, they likely said, “We’ll be standing right behind you.” 

By having fiduciaries as their plan advisors, sponsors can be assured that these advisors will be standing with them shoulder to shoulder, sharing their exposure to any incoming regulatory or legal fire.

Anthony Kippins is president of Retirement Plan Advisors LLC, a Cincinnati-based financial services company that provides retirement-plan fiduciary services and employee-benefit solutions to small companies. Kippins holds the AIFA (Accredited Investment Fiduciary Analyst) designation. He can be reached at [email protected]

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