Posted by: Professionals In Human Resources Association (PIHRA) | October 3, 2011

401K Fee Disclosure

By Harry Kim, Wealth Manager
LPL Financial

Background
Section 401(a) of ERISA requires plan fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries when selecting and monitoring service providers and plan investments. Fiduciaries must act with the exclusive purpose of providing benefits and defraying reasonable expenses of administering the plan.

New Regulation Summary
The plan sponsor fee disclosure, ERISA 408(b)(2), was released by the Department of Labor (DOL) in July 2010.  This long-anticipated regulation requires covered service providers to disclose to plan fiduciaries the fees they earn and the services they provide.  The rules are interim final at this point in time, meaning that changes could still take place before becoming the official regulation.  Final regulation is scheduled to be effective in April 2012.

Once implemented, ERISA 408(b)(2) is expected to require covered service providers to not only disclose fees but also supply a listing of their services.  It is important to review these specific services as you determine whether you have a retirement plan that is efficient and successful.

The most common types of 401(K) fees and expenses are:
•    Set-up and conversion fees
•    Recurring administrative costs
•    Investment management fees
•    Broker fees
•    Third-party administrators (TPA) fees

Intended Objective
ERISA 408(b)(2) was created to help plan fiduciaries and/or plan sponsors evaluate the reasonableness of the fees being paid by their retirement plans and participants since fees may affect the overall investment experience a plan participant receives in his/her retirement plan.

Potential Risks and Penalties to Plan Sponsors and Plan Fiduciaries  
Although the new regulation requires fee disclosures and service itemizations from service providers, it is ultimately up to the plan sponsor and plan fiduciary to make this information is available to plan participants.

Implementation
While the intent of the regulation is to provide transparency and meaningful information, plan fiduciaries and plan participants could risk making poor decisions about their retirement plans if they base decisions entirely on costs or fees. Fees are merely one factor to consider when evaluating a service provider.

Section 408(b)(2) may help provide relief between a retirement plan and a party in interest when the three following conditions are met:

1)    The contract or arrangement is reasonable;
2)    The services are necessary for the establishment or operation of the plan;
3)    No more than reasonable compensation is paid for the services.

The key drivers of 401(K) fees and expenses depend on the number of participants and the average account balance. Usually the number of participants and the average account balance are both negatively correlated with the cost of the plan. A higher number of participants and a higher average account balance both tend to correlate with lower fees as a percentage of assets.

Expectations of Plan Sponsors and Plan Fiduciaries
Due to ERISA 408(b)(2), plan sponsors and plan fiduciaries will not only have to disclose additional fee and itemization data to plan participants, plan sponsors and plan fiduciaries might be expected to make better informed decisions by comparing fees side by side per vendor and service received. It is possible that plan sponsors and fiduciaries will be expected to comply with Section 401(a) to an even greater degree since more material information in the form of fees and service itemization will be readily available for comparative purposes.

Our Help and Solutions
Independent and objective oversight can assist in complying and implementing a successful retirement program that complies with ERISA 408(b)(2) and Section 401(a). If you would like a review of your current plan or have any plan questions, please feel free to give us a call.

Harry Kim, MBA
LPL Financial 
Wealth Manager
3111 W Burbank Blvd Suite #103
Burbank, CA 91505
818-569-3600
http://www.lpl.com
Securities are offered through LPL Financial, Member FINRA/SIPC

This information was developed as a general guide to educate plan sponsors, but is not intended to be all encompassing. Each plan has unique requirements, and plan sponsors should consult their attorney or advisor for specific advice. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.

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