How Understanding Your 401(k) Plan Costs & Disclosures Can Reduce Your Personal & Plan Risks

Paul FennerEmployer Sponsored

The duty to pay reasonable fees for your plan services and to act solely in the best interest of participants has been a key tenant of ERISA since its passage.  Plan sponsors employing a disciplined and diligent approach to reviewing and negotiating fees can feel confident in their compliance with this area of responsibility.

The DOL has implemented a three-step approach to assist plan sponsors in fulfilling their Fiduciary obligations concerning fees by requiring disclosure to:

  • The government, through enhanced 5500 reporting, requires plan sponsors to disclose additional information about fees paid to service providers.
  • Plan Fiduciaries by service provides – through a description of all direct and indirect compensation received from plan assets for services provided to the plan
  • Plan participants – through annual and ongoing notices detailing fees for individual participant transactions and other investment-related information.
Your Fiduciary Responsibility Regarding Disclosures

Plan sponsors have a Fiduciary obligation to complete the disclosures to the government and participants and to ensure receipt of the disclosures from all the plan service providers.  These materials can serve as a basis for plan sponsors to use in evaluating the reasonableness of plan costs.

Generally, if the expense relates to the administrative or investment actives of the plan, it can be paid from the plan assets.  In a defined contribution (DC) plan, payments may be deducted from individual participant accounts or the plan’s forfeiture account.

ERISA is clear: Plan Fiduciaries must determine that any fees paid by the plan assets are reasonable based upon facts and circumstances relevant to that plan.  The plan sponsor must obtain and consider relevant information and then make a prudent decision supported by that information.  As with all Fiduciary duties under ERISA, it is important that plan sponsors follow a prudent process when deciding about the reasonableness of fees.  Both the DOL and the courts generally defer to a plan sponsor that follows a prudent process and can demonstrate the rationale for its decisions.

Plan Cost & Disclosure Best Practices

Here are several Plan Cost & Disclosure best practices that we have identified and put into place with our clients:

  • Costs are not dispositive – ERISA does not require a plan sponsor to select the lowest-cost provider or investment option.  Other factors, such as service levels, the reputation of the provider, and investment performance, may be considered when determining if fees are reasonable.
  • Understand what is included – The plan sponsor needs to understand what is included in the fee being charged and whether other charges for “a la carte services” will be incurred at a later date.
  • Duty to ask – Plan sponsors must understand the content of the fee disclosure material received from service providers.  If not, they must request additional information or clarification.  Additionally, plan sponsors may have an obligation to inquire as to the availability of lower-cost investment alternatives.
  • Documentation – plan sponsors, should build a record to document the information and factors used to determine the reasonableness of plan fees.  Prudence likely dictates that the plan sponsor review fees and services on at least an annual basis.

In line with the DOL guidance, the most common methods of fee allocation are:

  • Per capita – fees are spread equally across participants regardless of the account balance
  • Pro rata – fees are allocated on an asset basis, participants with a lower account balance pay less for plan services than those with a higher account balance
  • Per use – fees are charged to an individual for certain services that he/she elects to utilize.

Understanding Plan Cost and Disclosures are just one of many Fiduciary best practices that we cover as part of our employer-sponsored retirement plan series.  We designed this series to help support businesses of any size to help you reduce potential liability and provide a plan that best serves your employees.

Contact us for more information about any of these best practices or to see how we may better support your company and employees with a low-cost, high service employer-sponsored retirement plan.