Employers sponsoring 401(k) plans have been hearing from their investment advisors about “fee disclosures” that have to be given to plan participants who choose their own investments in the company plan.
The goal of these IRS regulations, now effective July 1, 2012, after having been delayed several times, is to arm investors with information about the cost involved in investing in the plan funds. Investment funds are required to provide fee information to plan sponsors and employers then have an obligation to keep the participants informed.
Employers may be lulled into a false sense of security if they believe that since fee disclosures documents are to be created by their service providers. Service providers are only required to make sure the documents are disseminated on time.
In actuality, the employer sponsoring the plan has a responsibility to evaluate the disclosures supplied by the service provider and to determine the reasonableness of the compensation that is being paid out of participant funds. Ignoring this step may result in the employer being charged with engaging in a “prohibited transaction” or being subject to a lawsuit for breach of fiduciary duty. As a starting point to measure the extent of their liability, employers should know that prohibited transactions are subject to an excise tax of 15% of the “amount involved” (in this case, any unreasonable fees) which, if the failure is not corrected in a timely manner, can mushroom to 100%.
Two Things Make Compliance Difficult
For the average employer, compliance can be difficult for two reasons:
- The service provider fee disclosures must be reviewed for accuracy and completeness. The employer will have to scrutinize the provider statements and investment correspondence they have had over time to make sure that the disclosure documents accurately reflect the cost of the provider’s services.
- It is incumbent upon the employer to compare those fees to the fees of other providers. This is also required when it comes time to engage a new provider or renew the contract.
Experts in the area can perform such reviews on behalf of employers, either as a stand-alone service or as part of an ongoing audit relationship. They can also advise on compliance procedures to align with Department of Labor requirements including the obligation to have written contracts by July 1, 2012.
By scrutinizing the employer’s documentation, and providing industry data for comparison, an expert can help assure an employer that the participants in the employer’s 401(k) plan are fully aware of the cost of the investments they make and are not subjected to unreasonable fees.