You may not have given much thought to your company’s 401(k) plan since establishing it years ago. And it is likely that you have a third party service provider, such as a bank or financial institution, doing the administrative work.
But a new ruling by the Employee Benefits Security Administration (EBSA) — which goes into effect July 1 — is forcing in-house retirement plan administrators to stand up and take notice. The new regulation, called the Final Sponsor Fee Disclosure Regulation under the Employee Retirement Income Security Act, could put your company’s plan administrators in serious financial jeopardy, says Charles Bernier, president of ECBM Insurance Brokers and Consultants.
Company plan administrators, who are fiduciaries, have always been personally liable if they do not fulfill their responsibilities. But this new rule, which aims to rein in third-party service provider fees, has the potential to bring financial calamity to plan administrators who are unaware that they, not the service provider, carry all of the liability for missteps.
“Many company plan fiduciaries — who can be the owner, a financial or human resources officer or director — don’t realize that they could lose their homes over this,” says Bernier.
Smart Business spoke with Bernier about the new rule and how to protect your company’s 401(k) plan fiduciary.
What does this new regulation say?
The Final Sponsor Fee Disclosure Regulation, or 408(b)(2), mandates full disclosure of all fees and compensation, direct and indirect, that are charged by 401(k) service providers. Prior to the regulation, the onus was on the company’s plan fiduciary, or trustee, to find out the service provider’s fees and compensation. Before, if a fiduciary didn’t ask, the service provider didn’t have to tell.
In this mandated disclosure, a service provider also has to state if it is a fiduciary for the plan, or whether it’s not. This can come as a surprise to plan administrators who may have assumed, incorrectly, that their service provider is also the fiduciary.
Do many businesses incorrectly make this assumption?
According to the Department of Labor, there are 483,000 retirement plan administrators in the U.S. Of those, 17 percent are aware that they are the fiduciary and 83 percent are not.
The problem with not knowing that you are the fiduciary of your company’s retirement plan is that you have unknowingly put your personal assets at risk. A fiduciary assumes personal liability for the responsibilities for administering the plan correctly.
A February 2008 Supreme Court ruling states: ‘Any person who is a fiduciary with respect to a plan who breaches any of the responsibilities, obligations or duties imposed upon fiduciaries by this title shall be personally liable to make good to such plan any losses to the plan resulting from each such breach.’
The word ‘personal’ means just that, and there is no corporate veil in place to protect you. So, in essence, you have pledged your home. That is the dirty little secret to this deal. And ignorance is no defense in a court of law.
The responsibilities and duties of a fiduciary, among other things, include making sure that the plan is paying out only reasonable plan expenses to a service provider.
How are reasonable plan expenses defined?
The benchmark number for a plan of 100 participants with $2 million in assets is 1.32 percent. If the service provider fee is, say, 2.5 percent, the fiduciary must document and report this.
This may not seem like a lot of money, but when you consider that there are 72 million Americans in 401(k) plans, and if everyone is overpaying fees by 1 percent for 25 years, compounded, you can see that it can be very lucrative for service providers.
If a company’s plan administrator has not documented this information, he or she may be liable for those extra fees; one estimate is that this can be as high as $75,000 per employee over the life of a 401(k). Estimates are that $2.3 trillion will be put back into employees’ 401(k) as a result of this new regulation. That money must be paid back to the employee’s retirement fund. If the company’s plan administrator is also the fiduciary, that money will come out of the administrator’s own personal assets.
What can plan administrators do before July 1 to protect themselves?
First, consult with your company’s attorney to find out if you are the fiduciary of your company’s 401(k) plan. Second, get a fiduciary liability policy before the rule goes into effect July 1. These plans are typically not expensive and can cover all individuals, trustees and board members who act as fiduciaries of the company’s retirement plan.
Finally, get a new administrator for your plan that has low fees and accepts fiduciary responsibilities.
What are some key dates for the new regulation?
July 1 is the date that the service provider must disclose its fees and compensation to clients and to explain whether it is the plan’s fiduciary. These meetings between service providers and a company’s plan administrator are already taking place all over the country.
On Aug. 30, the company’s fiduciary must issue a report on a monthly basis to each of its employees about how much the service provider is taking out of each 401(k) each month in fees and other compensation. If an employee complains about this fee to the Department of Labor and asks for an audit, the fiduciary must comply and present reports about these fees for the entire life of the 401(k). And these monies will have to be put back in. And if you are the fiduciary and do not have fiduciary insurance, those funds will be taken out of your personal assets.
Charles Bernier is president of ECBM Insurance Brokers and Consultants. Reach him at (610) 668-7100 or email@example.com.
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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 firstname.lastname@example.org.