401(k) Plan Sponsors Must Maintain “Reasonable Fees” or May Pay a Price – August 04, 2015 by Pam Dunlap

If you offer employees a company retirement plan, such as one that includes a 401(k) program, then, as plan sponsor, you are probably aware of your fiduciary responsibilities to those enrolled in the plan. One of those responsibilities is to ensure your plan pays only reasonable fees. This sounds straightforward but often is not given the due attention it deserves on a regular basis. And it could end up costing you.

For example, in 2010 a Fortune 500 engineering firm based in California paid a settlement of $18.5 million as a result of a class-action case. The case was brought by just two employees who claimed that the company was making insufficient effort to reduce the account fees in its 401(k) program. (Read a summary of the case.)

Compliance Requirements
There are three primary, ongoing tasks to fulfill to uphold your end of the fiduciary bargain when it comes to reasonable fees. As a plan sponsor, you must:

1. understand how fees are paid, whether by the you, the plan, both or by other means;
2. continually monitor fees and expenses as well as obtain explanations of direct and indirect fees from service providers; and
3. monitor service providers by performing due diligence, including obtaining descriptions of services and detailed explanation of fees, considering whether to obtain competitive bids and documenting the plan committee’s discussions.

Service Provider Responsibilities
Department of Labor (DOL) regulations require you to issue plan participants a detailed breakdown of fees and expenses pertaining to their accounts, as well as investment instructions. To do so, each covered service provider to the plan must disclose to the plan all services to be provided under their agreement, related compensation or fees, and how compensation or fees will be paid. Lastly, each service provider must release any information about conflicts of interest. Much of this information is also what you will need to comply with disclosure requirements on Form 5500, Schedule C.

A covered service provider is one that receives $1,000 or more indirectand/or indirect compensation. A service provider receiving direct compensation receives payments from plan assets or directly from the plan sponsor for services. Direct service providers could include a fiduciary; a provider serving the plan through an investment contract, product or entity that holds assets in which the plan has direct equity investment; or an advisor, manager or administrator to the plan. This includes accounting, auditing, legal, investment consulting, custodial, actuarial or appraisal service providers. A service provider receiving indirect compensation receives commissions, finder’s fees or revenue sharing by any source other than the plan or the plan sponsor.

Disclosure Requirements
Service providers must produce compensation disclosures that provide sufficient information so the reasonableness of the fee can be evaluated and expressed as a monetary amount, the percentage of the plan’s assets or a formula. The manner of receipt also must be disclosed as billed or deducted.

If a service provider does not provide required compensation information, the service provider could become a disqualified person. Transactions between the plan and a disqualified person are prohibited; and prohibited transactions must be reported on Form 5500 and as a schedule to the plan’s financial statements. Reporting these types of transactions would likely lead to questions as to why a fiduciary would allow the plan to pay fees to a disqualified person, therefore exposing a plan sponsor to significant risk.

Plan sponsors must disclose to participants fees and expenses in an apples-to-apples comparison format and on quarterly statements. The quarterly statements must disclose specific fees and expenses deducted from individual accounts and make information available regarding investment in the plan.

Best Practices
As the fiduciary over your employees’ retirement plan, make sure to schedule time for ongoing plan maintenance to help you remain compliant.

• Monitor your plan’s agreements
• Monitor your plan’s fees
• Monitor your service providers
• Monitor your plan’s remittances

Don’t risk lawsuits or open the door to unnecessary liability. Conduct your due diligence and execute your fiduciary responsibility.


We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Pam Dunlap at pdunlap@cohencpa.com or a member of your service team for further discussion.

 

This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.