New federal rules regulating 401(k) plans will ultimately have the effect of driving down fees — but, in many cases, at a cost.  One result of an increased emphasis on price will be a lack of attention to value. The result of this could be a commoditization of plans that makes them less expensive but not necessarily any better for participants, and in some cases worse.

The new rules from the federal Department of Labor (DOL) require employers to determine, and all service providers to disclose, all fees and the services they cover by July 1. Though the DOL has sent plan sponsors reams of documents outlining its requirements under the new rules — and listing fines that could befall them for not complying — many of these employers remain unaware of this deadline.

Those who are dutifully on schedule for this compliance are also probably aware that they must then determine whether these fees are reasonable — that is, where these charges fall in the national market. If employers find that these fees are relatively high, they must make arrangements to assure that they’re reasonable, perhaps by changing service providers.

Previously, federal rules didn’t require these service providers, including the large financial institutions that package 401(k) plans and sell them to companies, to disclose all fees. Though service providers have long been required to disclose fees when asked, mandatory disclosure rules stemming from the Employee Retirement Income Security Act (ERISA) of 1974 haven’t come close to covering the plethora of fees charged by plan providers, investment companies supplying investments for plans and the advisors engaged by sponsors.

Thus ensued decades of murkiness about fees, further beclouded by the benign neglect of overworked HR people at small and midsize companies. Aware that this state of affairs has led to excessive fees in many cases, the DOL is trying to do something about it to stanch the unnecessary hemorrhaging from employees’ retirement accounts. By requiring employers to know these fees and seek out lower ones when appropriate, goes the federal logic, excessive fees will inevitably shrink under the sunlight of disclosure.

There’s little doubt that the new rules will have this effect — accelerated by the entrée of low-cost providers in what will be an increasingly low-cost arena — but they will also have an unintended consequence: commoditizing 401(k) plans, often to the detriment of participants. Like most quantitative analyses, benchmarking fees will inevitably result in apples-to-oranges comparisons. How else can one say, without reams of nettlesome footnotes, precisely where one service provider’s fees land relative to those of its competitors?

The DOL is seeking to retain a focus not just on price, but on value, as the new rules require employers to determine and benchmark fees “for services provided.” Yet in plan sponsors’ rush to benchmark fees — and, in many cases, after getting eye-opening results, to seek lower ones — this stipulation doubtless will receive short shrift unless sponsors steadfastly maintain a quality orientation.

The rationale for preventing excessive fees is to enable employees to accumulate more wealth to get them through retirement. Yet if employers fail to also focus on services, plans won’t be able to serve participants by delivering the best returns for their particular situations: their age (time horizon for retirement), retirement goals, risk tolerance, retirement goals and existing wealth.

It’s entirely possible that after plans’ fees are benchmarked, some sponsors will find service providers who will do the same work as their current providers but at a far lower cost. Or these sponsors might hit the jackpot by finding lower fees accompanied by much better service. Yet the powerful tide of commoditization will surge against the likelihood of these outcomes unless sponsors view the new rules as a wake-up call for positive action; they should view them as an opportunity to lower fees and improve service.

This conscientious mentality compels consideration of what the components of good service might be. These include governance to maintain a steadfast dedication to employees’ interests, investment evaluation to examine the worthwhileness of specific items such as mutual funds, and education to empower employees to make intelligent, unbiased choices for their 401(k) portfolios.

Without sufficient plan education, a 60-year-old employee might end up with the same portfolio risk levels as 25-year-old, exposing him to potential losses from which he will never have time to recover and thus jeopardizing his retirement.

The new rules also require sponsors to make clear distinctions between fiduciaries, who are legally bound to advise clients in their best interests, and brokers, who are prohibited by ERISA rules from advising participants on the suitability of specific investment products.

So, at a time when the lead service provider in many 401(k) plans is a broker whose services may be fraught with conflicts of interest, it’s more important than ever for plan sponsors who want to enhance plan quality to seek the advice of a wholly independent fiduciary. Moreover, in an era when people change jobs and investment markets put on different faces from year to year, such advisors can play a highly beneficial role in assessing the fees of plan providers on a regular basis, preferably every 90 days.

Discipline is essential not only to get plans in shape, but also to keep them that way. Staying in shape may require a personal trainer working with you in your interest; this doesn’t necessarily come with the lowest-price gym membership.

Aside from doing the right thing for your employees, there’s another reason to assure that the rush to lower fees doesn’t eclipse considerations of quality: It’s smart business.

Remember that one reason your company has a 401(k) plan in the first place is to be competitive in the marketplace for skilled employees. Sponsors whose plans have the best returns and best employee outcomes will have an edge as the economy recovers and the labor market gradually ceases to be a buyer’s market.

This is not a lure that you can fashion in short order. To attract the best employees five years from now, you must begin work on your plans today. The new DOL rules present an unprecedented opportunity to do so.

Anthony Kippins is president of Retirement Plan Advisors, Ltd., a Registered Investment Advisory firm that addresses the needs of retirement plans and the employees who invest in them.

An Accredited Investment Fiduciary Analyst (AIFA®) with more than 30 years of experience domestically and abroad, Kippins specializes in providing fiduciary advice to retirement plans on governance, investments and educational services. He also advises individual clients on retirement planning and investment management after retirement.

Kippins also serves as managing director of Institutional Fiduciary Assurance LLC, an organization that provides fiduciary advice to trustees of endowments, foundations, non-profit organizations and charitable trusts. He can be reached at

Published in Cincinnati

Many companies offer their employees bundled 401(k) products from mutual fund or insurance companies, but if the organization is unhappy with any component of the plan, it is forced to physically move the plan’s assets and start over by selling them and then repurchasing them elsewhere because the individual plan components cannot be “unbundled.”

However, an open architecture plan allows employers to change any of the silos of the plan — the registered investment adviser, the third-party administrator, the record keeper — without having to move the plan itself, says Peter Mooney, CEO of Source Companies LLC, a subsidiary of The Ancora Group.

“The strength of open architecture is that you can custom build your plan to meet your needs and those of your work force,” says Mooney. “You can change any of the components of the plan without having to start over.”

Smart Business spoke with Mooney about how open architecture can ensure that you never have to move your plan again.

What are the disadvantages of bundled products?

When you use a bundled product, that plan is not owned by you, the employer. Instead, it is owned by the investment company, which negotiates each of the components and their fees, and then sells them bundled together.

As a result, you are tied to whatever the investment company has negotiated. If you are not happy with some component of the plan, you must sell all the assets, move the entire plan to another investment company and then repurchase the assets. That also requires terminating the relationship with your third-party administrator and setting up a relationship with a new one.

What is changing in the 401(k) industry?

Instead of the insurance or mutual fund company owning the 401(k) plan, companies are moving toward having a direct relationship with a custodian through open architecture. Then if, for whatever reason, you are not happy with an investment, for example, you can just change the investment. The same would be true with your third-party administrator, your record keeper or the performance of your investment adviser. The employer has control and can change out any of those components without ever having to change that core custodial account because your company owns that relationship.

With the recent requirements of full disclosure of 401(k) plan fees and more thorough reporting, there is an increasing trend toward open architecture. People are tired of physically moving their plan from company to company. It is disruptive to employees to have to sell everything and then repurchase it, requiring them to fill out forms and re-elect how their money is being allocated.

Open architecture makes everyone’s lives easier, allowing you to have a direct relationship with the custodian and giving you control over that relationship. You can replace your investment adviser, the third-party administrator or the record keeper, but you do not have to replace the base of what you started with.

Is an employer qualified to make decisions about changing components of the plan?

If your investment adviser is doing his or her job properly, you should be educated enough to make those decisions. There should be checks and balances of what to look for and to make sure that other people are doing their jobs. It sounds like it puts more onus on the employer, but it really does not.

As long as the plan sponsor and the advisor establish a proper investment policy statement, there is no more burden on the employer. In fact, it actually makes their life a lot easier in the long run.

What would you say to an employer who doesn’t want to be involved in those decisions?

Your investment adviser can take a fair amount of the responsibility off of the employer, but ultimately, you are still responsible for the plan. You need to be educated about the issues, and if you do not want to be involved in it at all, I would recommend that you do not offer a retirement plan.

What does a company need to be aware of regarding 401(k) fees?

Previously, many advisers claimed to sell 401(k) plans but were not really in the 401(k) industry. They may have sold two or three plans but were not advising them properly. Fees at that time were very, very high.

Over the years, the industry has consolidated and the surviving organizations that are in the business really understand 401(k) plans and make them their focus. The good ones are trying to drive down fees for employees as well as the employer while educating the trustee on the changes in the industry.

Most important, regarding fees, an employer must understand the value of the services being delivered by each of the service providers to ensure it is getting what it is paying for.

Employers should drill down to find out what each of the fees are. What are the investment adviser fees? What are the third-party administrator fees? What are the record keeper fees? And what are the custodian fees? Those are the biggest areas of fees associated with a 401(k) plan, outside of the expense ratio for mutual funds. What questions should a company be asking to ensure that they have the right 401(k) plan to meet their needs?

The plan sponsor should ask every service provider: How are you going to help my employees meet their retirement needs? What type of education do you provide me and my employees? Do you have a product that can grow with me as my business expands and changes? Can you provide me three references of similar companies to mine in size and industry?

Then make your decision based on what you learn.

Peter Mooney is CEO of Source Companies LLC, a subsidiary of The Ancora Group.  He is also a Registered Representative of Safeguard Securities, Inc. (Duly Registered Member FINRA/SIPC and an SEC Registered Investment Advisor). Reach him at (216) 593-5095 or

Insights Wealth Management & Investments is brought to you by Ancora

Published in Cleveland

For some companies sponsoring 401(k) plans, the next few months may be a period of whistle blowing – with painful consequences.

If these sponsors fail to comply with new federal regulations, employees may blow the whistle on them with federal regulators, potentially triggering costly fines and other sanctions and paving the way for employee lawsuits; most federal investigations of this type start with employee complaints.

To prevent this unfortunate scenario, some companies may have to blow the whistle on the large financial institutions that provide their plans for failing to provide required information they need to assure their plans comply with the new rules from the U.S. Department of Labor (DOL).

Central to this potential consternation is the reality that many employers — especially small and mid-size companies — aren’t aware of precisely how much their 401(k) plans cost, what their plans and participating employees are receiving in return for these fees and where this value, or lack thereof, lands in the national spectrum of plan pricing for the services provided.

In issuing the new regulations, the DOL is seeking to make employers and employees aware of the value they’re getting for the fees they’re paying as part of a larger effort to enable plan participants to make more informed investment choices. Fees are among the most significant factors affecting total investment returns.

The regulations require employers to know all such fees, and what they’re getting for them, by July 1, and to ascertain whether these fees are reasonable for the services being provided. That means they’ll have to determine where this value stands in the national marketplace by benchmarking fees, which is no simple undertaking.

Also by July 1, the financial services companies, brokerages and insurance companies that provide 401(k) plans are required to have given plan sponsors a rundown on all fees and the services these fees cover. If employers don’t receive this information, they’ll be hamstrung in their efforts to benchmark fees against the market to determine whether they’re reasonable. In such cases, employers will have no choice but to blow the whistle on their plan providers.

However, the companies that provide 401(k) plans tend to be large, highly sophisticated institutions with significant in-house and outsourced legal resources, so they’re amply equipped to protect themselves from liability. Most, if not all, of these companies are expected to deliver the required fee-for-services information to plan sponsors.

But in many cases, this information may be strewn throughout a document the size of a phone book — a document that the human resources people overseeing 401(k) plans at many companies don’t have time to read, much less interpret.

With the July 1 deadline approaching, many employers should have a great sense of urgency. Yet many, unaware of the new rules or their seriousness, do not. In many cases, employers who are aware of the rules aren’t concerned because they’re receiving informal, oral assurances from their plan providers that everything will be all right.

Yet this handholding means nothing because, unlike their sponsor clients, these institutions don’t have fiduciary responsibility, with all the attendant risk and liability. As long as providers meet their disclosure obligations under the new laws, they’ll be fine. Meanwhile, employers who fail to act on this information as required will be left twisting in the wind.

One way that sponsors can reduce their liability is to outsource their regulatory obligations to an independent fiduciary advisor who evaluates plans from the ground up.  This way, sponsors can get an unbiased view of providers’ fee-for-service disclosures and benchmark fees against the national market to determine whether they’re reasonable. If they aren’t, these employers could attempt to negotiate them downward or put their plans out to bid for a new provider. Further, an independent advisor can X-ray plans to see if they’re achieving their various goals and meeting all federal requirements.

This way, they’ll have a better story to tell federal regulators – and employees who may become outraged when they read their statements next fall and learn of the whopping fees being deducted from their accounts. These statements will be the first to show all fees. Currently, statements merely show account totals after these fees have been siphoned off.

Most people outside the 401(k) industry would find it astonishing that 401(k) plan sponsors and participants don’t know the fees involved or specifically what services these fees cover.  Unfortunately, this is a tale of benign neglect for overworked HR departments, especially at small companies that lack in-house expertise in defined contribution plans. There’s always more pressing work to do, and many plan administrators are understandably reluctant to lift the hood on plans that may have longstanding deficiencies. Now, the new DOL rules are changing this state of affairs.

The key language in the new rules is “fees for services provided,” because this focuses on value: Are employees getting services worth the fees being charged? In many cases, they’ll find they aren’t.

Employers who become aware of this sooner than later and act on it in accordance with the new rules will be taking a major step toward protecting their companies and assuring the integrity of their plans and their capacity to help employees build their resources for retirement.

Anthony Kippins is president of Retirement Plan Advisors, Ltd., 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

Published in Cincinnati

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

Insights Risk Management is brought to you by ECBM Insurance Brokers and Consultants

Published in Philadelphia

Across the country, companies that sponsor 401(k) plans have been going about their business every day, unaware of an impending deadline for compliance with sweeping new government regulations.

When the deadlines pass, no alarm will sound. Instead, dire consequences will eventually befall plan sponsors without warning.

The silent alarm goes off July 1, by which time sponsors are required to be aware of all fees charged by their plan service providers and the services they’re receiving for these fees. (The original deadline was April 1.)

Moreover, they must determine whether these fees are reasonable for the services being provided — a complex undertaking that involves benchmarking the fees against comparable plans. Many sponsors will find that their plans are paying far too much for far too little.

Awareness of the new requirements and their comprehensiveness is astonishingly low. Few companies are doing much, if anything, to gear up for the new requirements. By remaining uninvolved, they’re unwittingly bringing on a world of hurt upon themselves.

Until now, sponsoring companies have been able to remain largely ignorant of the full extent of the fees coming out of their employees’ accounts, though federal rules have long required awareness of these matters.

New regulations from the U.S. Department of Labor seek to end this lack of compliance by reinforcing and expanding existing rules.

The quarterly account statements employees now receive from plan providers show returns net of fees. In the fall, these statements will show actual returns and fees in tabular form.  As a result, employees will see for the first time how much their investments have earned and how much plan service providers have taken out of their accounts in fees.

Many employees will see red. They’ll line up outside the doors of HR offices, demanding to know why they’re paying so much.

Companies will get a rude awakening from the clamor of employees reacting to the news that big chunks of their retirement assets are lining the pockets of service providers. They’re going to share this pain with company executives.

The refrain of questions and expressions of outrage will seem never-ending: “How long has this being going on? Why didn’t you tell us? Why haven’t you taken steps to lower fees? Can’t we get lower fees elsewhere?”

This is only part of the pain. The DOL is ramping up staff to monitor — and, potentially, fine — plan sponsors who are tardy meeting these deadlines. It gets worse: Companies that fail to comply with the new regulatory regimen could have their entire plans disqualified, as every transaction conducted on the wrong side of the law could potentially be classified as prohibited.

Since plan sponsors have rigorous fiduciary obligations to their participants, this state of compliance disarray could be a springboard for lawsuits by employees. Indeed, many lawyers who specialize in this kind of action are doubtless licking their chops over the potential for lucrative class-action litigation. Unlike many employers, these attorneys are well aware of the new rules.

No less daunting is the potential for regulatory sanctions stemming from tips from employee whistle-blowers who learn about the new rules from friends at other companies.

If the capital markets act predictably, indications of shakeouts in the 401(k) plan provider marketplace may become readily apparent. Golf and tennis tournament broadcasts this summer may show ads from competitive plan providers seeking to take business away from high-fee providers. HR departments learning about their new burdens this way will be far behind in the extensive preparations required to fully comply with the new rules.

Some plan providers, including large financial services companies, have doubtless given plan sponsors generalized — and, notably, nonbinding — assurances that all will be well. Yet these large companies are committed to nothing because, as non-fiduciaries, they don’t have the same obligations as their sponsor clients, nor do they have any appreciable liability in the matter.

One of the goals of the new rules is to make a clear distinction between advisors and brokers. Although non-fiduciary brokers are prohibited from dispensing actual investment advice, many do. The rules don’t require plans to have an advisor per se, but if they do, this advisor should be a fiduciary. Such arrangements can enable sponsors to effectively outsource some of their fiduciary responsibility.

Moreover, plan sponsors must evaluate newly required compensation disclosures from service providers to determine the motivations involved in determining investment options for the plan. For example, many plan providers charge investment companies for shelf space, which makes such selections biased.

The new rules are designed to support the goal of transparency by helping employees (and company owners, who are in these plans themselves) keep more of their investor returns. Thus, they help everyone in a company achieve the goal of a more dignified retirement. Assuring compliance with these rules advances this mutual goal of labor and management.

Anthony Kippins is president of Retirement Plan Advisors, Ltd., 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

Published in Cincinnati

Beginning in May, approximately 60 million people will discover some new information in their 401(k) statements. Not only will they find out whether they made or lost money, for the first time, many will see how much they paid in plan fees and expenses.

Of course, plan sponsors not only have to comply with the new regulations and meet their fiduciary responsibilities, but they also have to justify the plan’s administrative costs to participants, who have been resorting to class action lawsuits after enduring more than a decade of lackluster returns.

“Plan sponsors may face a tsunami of anger and questions from participants unless they get out in front of this change,” says Kyle Pifher, principal, retirement plan services for Findley Davies. “Otherwise, some participants may be shocked to discover how much they’re paying in plan fees.”

Smart Business spoke with Pifher about the impact of the new disclosure regulations and why plan sponsors need to take proactive steps to address employee concerns.

What are the new mandates?

There are two critical components in the new regulations. First, beginning in April 2012, third party providers and recordkeepers must disclose a detailed summary of all fees and charges that exceed $1,000 to plan sponsors as mandated by 408(b)(2). Then starting May 31, individual participants will see their portion of those fees on their plan statements as mandated by ERISA Section 404(a)(5).

Why did the DOL propose new regulations?

The need for greater transparency became apparent following the market correction in 2008, when participants openly questioned fees as their account balances plummeted. Essentially, there was no consistency in the way fees were assessed or disclosed, making it difficult for plan sponsors to uphold their fiduciary responsibilities, which include prudent selection of service providers, monitoring fees and ensuring that reasonable compensation is paid for services to maintain the plan. In other words, the DOL is simply responding to the long-standing need to disclose a detailed break-out of fees and expenses that were often consolidated into a single charge or hidden in the fine print.

How do the changes shift or alter the duties and responsibilities of plan sponsors?

The fiduciary responsibilities of plan sponsors are essentially the same, but the new laws and detailed fee disclosures will certainly illuminate their rigor and performance. For example, participants may wonder whether the fees are reasonable given the plan’s risk and returns, since fiduciaries have an obligation to act prudently and solely in the interest of participants by monitoring plan fees and ensuring that the charges aren’t excessive. So, sponsors will need to show how they benchmark third party fees and be prepared to explain their selection and oversight methodology. Participants may also question their investment choices.

What are the benefits for plan sponsors and the possible drawbacks or unintended consequences?

Certainly the increased transparency will help sponsors benchmark and compare fees across companies and industries and negotiate every charge, which could ultimately lower the total cost of the plan. The good news is that the fee disclosures may encourage participants to read their statements and manage their investments, because optimizing retirement plan returns benefits everyone in the organization. On the negative side, this could create animosity toward the employer if fees have not been disclosed and employees feel as if they have been left in the dark. And we’re seeing more class action lawsuits from disenchanted participants, who are protected by the prudent man rule, which states that trustees must manage another’s money using skill and care.

How are companies using this new information to assess service provider fees?

We’re seeing more companies engage an outside consultant to conduct plan reviews and side-by-side fee comparisons along with a greater desire to benchmark current fees against industry standards. As a result, more companies are soliciting bids and changing providers, especially if they feel that plan providers aren’t charging reasonable fees or delivering value.

How can plan sponsors head off problems before they occur?

Follow these steps to head off problems before they occur.

  • Review third party fees and expenses: Know where you stand before participants receive their May or June statements, so you can anticipate their concerns and negotiate fee reductions or even change providers. It’s also prudent to review your plan’s investment choices to see if they are aligned with your employees’ risk tolerance and desired rate of return based upon the current needs and demographics of your employee population.
  • Communicate transparently and proactively: Fully disclose all service fees using language and terms that resonate with your employee base. Describe the services they provide and how your current fees compare to those charged by other providers.
  • Provide education: Offer educational meetings, brochures and call center support, so employees understand the role of plan providers and how they develop their fees. In fact, this is the perfect time to review retirement plan fundamentals and the current investment options; because your 401(k) isn’t a benefit unless it actually helps your employees meet their retirement goals.

Kyle Pifher is principal, retirement plan services at Findley Davies. Reach him at or (614) 458-4651.

Published in Akron/Canton

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

Published in Cincinnati
Friday, 03 February 2012 17:16

Are your 401(k) plan fees unreasonable?

All too often, small businesses sponsoring 401(k) plans sign contracts with service providers that call for outrageously high fees that are passed on to participating employees.

Many plan sponsors have no inkling that their fees may be unreasonable for the services they’re receiving because they don’t even know the amounts involved. Under new regulations from the federal Department of Labor (DOL) that go into effect this year (see “The 401(k) Regulatory Tsunami”), plan sponsors are now required to determine these amounts and whether they’re reasonable.

The new regulations present a series of compliance hurdles that employers must clear, beginning with a requirement to demonstrate that they’ve determined their plans’ arrangements for fees and services (see “April 1 deadline for 401(k) plans is no April Fool’s joke”). The original deadline was April 1, but the DOL has extended it until an as-yet-unspecified date in July. This extension merely delays the inevitable, so plan sponsors should begin obtaining fee and service disclosures now rather than waiting until the last minute.

The federal government has mounted a regulatory drive to keep workers’ accounts from being drained by 401(k) plan service providers. There is ample evidence to suggest that many of the large financial institutions in this industry (primarily insurance companies offering plans through investment brokers) have long charged fees that are exorbitant.

Under the new DOL rules, workers’ quarterly account statements will now include a listing of fees, so workers will be able to see this drainage. Previously, they received only investment return figures net of fees.

As fiduciaries — a legal status that carries great potential liability — employers have long failed to comply with federal rules designed to protect employees from high fees. Because of the new regulations and their disclosure provisions, employers who continue in this failure will face not only steep fines from regulators, but also hostility from employees when they see just how much they’re paying in fees.

In fees applied to 401(k) accounts over a lifetime of employment, every fraction of a percentage point is significant. Half a percentage point can make the difference between a comfortable retirement and an uncomfortable one.

One would think that, like many products and services, these fees would become homogenized. This is the case in efficient markets. But the market for 401(k) plan services is by no means efficient because plan sponsors, who are busy running their businesses, don’t pay enough attention. They tend to haplessly enter into arrangements with service providers that persist for decades without scrutiny. As a result, fees in this market are all over the map.

For many plan sponsors, especially small companies that lack in-house benefits expertise, this market is foreign terrain. Now, the DOL is requiring that sponsors explore it. This process is known as benchmarking fees — determining where a given plan’s fees stand relative to what’s available on the open market. The data for this is fairly accessible. Far more difficult than finding the data is interpreting it and applying it to a given company’s situation.

For sponsors seeking to avoid apples-to-oranges fee comparisons, the logical move would be to break down fees for each service. Yet many service providers historically haven’t itemized services. They take a sizeable percentage from accounts according to the terms of a vaguely worded contract that guarantees little — except the fees. The new rules require service providers to specifically disclose fees for each service provided.

With this detailed information in hand, sponsors can go about the time-consuming task of researching the market to make fee comparisons. Yet, there’s a way that sponsors can save the time it takes to scroll through endless screens of fee data. They can use a tool with which they are probably already familiar: a request for proposals (RFP).

Instead of going to the market, sponsors issuing RFPs can bring the market to their doorsteps. If much lower fees come in for the same services, then sponsors can engage new service providers. Then, to monitor an ever-shifting market over time, plan sponsors can periodically run spot checks (preferably, every three years) on where their fees stand, issuing RFPs to take serial snapshots of fees against which to benchmark their current arrangements. Thus, sponsors can convincingly demonstrate to employers and regulators that they are continuously endeavoring to determine where their fees stand in relation to what the market has to offer and, if appropriate, changing providers to contain fees.

Procedurally, using RFPs is fairly simple, but the devil lies in the RFP details. Care must be taken to construct the RFP to elicit fee-itemized proposals from firms that are accustomed to servicing plans of the company’s size and contribution levels. As the RFPs should be constructed with this kind of market knowledge, it’s a good idea for smaller companies to engage the services of a qualified advisor to write their RFPs.

Companies that engage qualified fiduciaries for this function have the advantage of actually outsourcing some of their fiduciary responsibility and attendant liability. But when sponsors use brokers, few of whom are fiduciaries, they retain all liability.

The key to complying with the DOL requirement for reasonable fees is to establish a clear, sensible benchmarking process. Plans sponsors can take comfort in the fact that regulators are more interested in seeing a clear process than in a given set of fees, as there is no right or wrong fee solution in this subjective arena. The point is to make an effort by adopting and steadfastly following a sound process.

Yet, employers whose efforts not only result in a good process but also identify reasonable fees for high-quality services — and take advantage of them — will fulfill not just the letter but the spirit of their fiduciary duties. And, most importantly, they will assure a better retirement for their employees.

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

Published in Cincinnati
Thursday, 01 December 2011 12:33

The 401(k) regulatory tsunami

A regulatory tsunami is headed toward companies sponsoring 401(k) plans. It will arrive next year when new federal rules take effect, creating an unprecedented burden of accountability for employers.

More than ever, employers will be required to assure that fees associated with these plans are reasonable for the services being provided. To do so, they should move expeditiously to determine and evaluate all plan fees.

Employers are already required to exercise this due diligence by the Employee Retirement Income Security Act of 1974. Yet the fees charged by large financial institutions providing 401(k) plans vary widely and are extremely difficult for employers and employees to ascertain. Many aren’t aware that their fees may be too high because, until now, the government hasn’t required plan providers to voluntarily disclose all fees.

Nevertheless, by entering into arrangements with plan providers that involve unreasonably high fees, many employers have been failing to protect participating employees as required by ERISA. To remedy this lack of compliance and to help employees make more informed investing choices, the U.S. Department of Labor has issued the new rules, which reinforce and expand employers’ existing responsibilities as plan sponsors.

Effective in 2012, these rules will open up new terrain for potential federal fines — as the DOL is substantially increasing its investigative staff — as well as lawsuits from employees. This liability stems from employers’ role as plan fiduciaries, a regulatory/legal status meaning that they must consistently put plans’ and participants’ financial interests ahead of their own.

The new rules require plan providers to disclose fees to employees in chart format in quarterly statements. Currently, these statements show investment returns net of fees, so employees don’t know how much they’re paying plan providers or investment companies that supply products for their plans.

Though the rules require plan providers to disclose fees in an easily understandable format, there are indications that the revised account statements may turn out to be long, confusing documents — something on the order of a prospectus. Confusion will ensue, and employees will queue up at HR to ask what it all means.

After making sure employees understand the newly required disclosures — which is, itself, a fiduciary responsibility — employers will undoubtedly be lambasted with bitter complaints from employees who were unaware of the amounts of fees being deducted from their accounts and others who simply thought their actual investment returns were lower.

Accordingly, it’s imperative that employers act now to “X-ray” their plans or engage a qualified consultant for that purpose, so they understand precisely what fees are being charged for the services being provided. This will involve reviewing reams of plan documents and confronting plan providers to ascertain fee information.

But that’s only the beginning. The tsunami’s force is amplified by the “reasonableness” requirement: How can employers know whether fees are reasonable?

To do so, they must determine where their plans’ fees fall relative to industry norms, so employers must benchmark fees against the full spectrum of the national market for plans of the same size providing the same services. These data-intensive comparisons can be highly complex, especially for small firms that lack the necessary expertise in-house.

The new rules also put increased pressure on sponsoring employers to assure that anyone advising 401(k) plans or participating employees is a fiduciary. ERISA rules have long prohibited non-fiduciaries, including brokers, from advising employees on the suitability of specific investments — a scenario rife with potential conflicts of interest.

Yet, because of lax enforcement that the government is now trying to repair, brokers typically play a dominant role in servicing 401(k) plans. By contrast, fiduciaries — who must avoid even the appearance of conflicts — must comply with stringent regulatory standards that don’t apply to brokers. Moreover, fiduciary advisors are subject to substantially greater legal liability.

Hence, the new DOL rules require employers to determine whether plan consultants are fiduciaries. If they aren’t, fiduciary responsibility — and liability — for the plan resides with the employer.

Companies that proactively get out in front of the tsunami by lining their corporate doorsteps with due diligence sandbags will minimize the damage. They have no time to waste.

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. He is an Accredited Investment Fiduciary Analyst.

Published in Cincinnati

With the availability of defined-benefit pension plans diminishing as benefit offerings and the future of Social Security remain uncertain, 401(k) plans have evolved into a very popular benefit for employees to use for retirement savings. In addition, company owners and administrators have used 401(k) plans as strategic planning tools to aid in recruiting and retaining key employees.

While 401(k) plans offer tremendous advantages to employees and plan sponsors, they must also comply with several annual IRS testing requirements. One of those annual testing requirements is a top-heavy test.

Smart Business spoke to Phil Scott, Investment Advisor Representative with Sequent Retirement & Benefits Group, about the consequences of a top-heavy 401(k) plan.

When does a 401(k) reach top-heavy status?

A 401(k) reaches top-heavy status when more than 60 percent of the plan’s assets are attributable to key employees. In determining the 60 percent ratio for any plan year, the calculation is made as of the last day of the immediate preceding plan year. Key employees are best defined within 416 of the Internal Revenue Code, but here is a simple checklist that will help determine whether or not an individual is a key employee:

  • Officers of the company earning greater than $160,000 annually
  • Any employee who owns more than 5 percent of the company.
  • Any employee who owns more than 1 percent of the company and earns more than $150,000 annually

What are the implications or penalties when a 401(k) plan falls into top-heavy status?

The plan must meet special minimum contribution and vesting requirements for non-key employees each year that the plan is deemed top heavy. The minimum contribution required to bring the plan back to compliance is the lesser of:

  • 3 percent of annual compensation for all non-key employees; or
  • A percentage equal to the highest percentage contribution of any key employee

Due to several factors, some plan sponsors may be concerned their 401(k) plans are currently headed into top-heavy status. The economic recession and financial meltdown of 2007-2008 forced many companies to cut salaries, downsize staffing and reduce or eliminate company matching contributions to their 401(k) plans. In reaction to these factors, some 401(k) participants have reduced or even stopped their contributions. Other participants have been forced to take financial hardships or full distributions as a result of job losses. When combining these factors with a plan whose key employees have maintained their contribution levels and seen their account balances improve as a result of the market's recovery, it is a scenario that may cause the 60 percent top-heavy ratio to be compromised.

How can plan sponsors protect themselves against this top-heavy threat?

Plan sponsors can protect themselves against this top-heavy threat by adopting a Safe Harbor 401(k) plan, which is a specific type of 401(k) plan that encourages non-key and key-employee participation. Safe Harbor plans provide plan sponsors more leniency in setting up their plans, without concerns of becoming top heavy. The Small Business Job Protection Act of 1996 provided for this new type of 401(k) plan, which carries four mandated conditions to maintain its Safe Harbor status:

  • Required annual contributions from the company
  • 100 percent immediate vesting attached to the required annual company contributions
  • Required annual Safe Harbor notification distributed to all eligible plan participants
  • Withdrawal restrictions

By following these Safe Harbor guidelines, plan sponsors are permitted to allow their 401(k) plans to become top heavy with no restrictions or penalties.

Securities & Advisory services offered through National Planning Corporation (NPC), Member FINRA / SIPC, a Registered Investment Adviser. Sequent Retirement and Benefits Group and NPC are separate and unrelated companies.

Phil Scott is an Investment Adviser Representative with the National Association of Securities Dealers and a licensed Life & Health Insurance Representative, with 20 years of financial services experience. Reach him at (888) 456-3627 or

Sequent is an outsourcing and consulting firm that helps clients improve business performance through HR support, payroll/HR technology and benefits consulting. Sequent also has a safety/risk group and a consulting function that specializes in learning strategies, change management and leadership development.

Published in Cincinnati
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