Removing The Veil From 401(k) Fees

Editor: New Labor Department rules will require more disclosure about fees charged on 401(k)s effective with the quarter beginning July 1, 2012 under Section 408(b)(2) of ERISA. What is the purpose of the new rules? Which plans are included and which plans are excluded?

DeSaro: The Department of Labor has undertaken a series of regulatory initiatives to ensure that Plan Fiduciaries and Plan Participants and their beneficiaries obtain comprehensive information about the services provided to the plan and the cost associated with those services. This new regulation is designed to help identify if there are any conflicts of interest, to help select and monitor third-party providers, and to assist Plan Fiduciaries to adhere to ERISA Section 404(a)(1), i.e., which is to act prudently and solely in the interest of the plan’s participants and beneficiaries and for the exclusive purpose of providing benefits and defraying reasonable expenses of administering the plan. The plans that are included are ERISA-covered defined benefit and defined contribution pension plans. Excluded plans are simplified employee pension plans (SEPs), SIMPLE retirement accounts, IRAs and certain annuity contracts and custodial accounts described in Internal Revenue Code Section 403(b). It also excludes employee welfare benefit plans.

Editor: What are the fees under 408(b)(2)? Who is a Covered Service Provider (CSP)?

DeSaro: The fees under 408(b)(2) are going to come in many shapes and sizes. For the most part they are the fees for services provided to a plan from a Covered Service Provider, either as direct or indirect compensation. Most plans will have 408(b)(2) fees and need to adhere to this new disclosure.  As to what service providers come under the rubric of a CSP, the final rule defines them as a CSP that enters into a contract or arrangement with the covered plan and reasonably expects $1,000 or more in direct or indirect compensation.

Editor: What services are provided by the CSP?

DeSaro: It can be any services rendered to the plan that are expected to reach at least $ 1,000 to a CSP.  Indirect compensation is fees paid to any entity other than the Plan Sponsor, the CSP, an affiliate or a subcontractor, including accounting, auditing, actuarial, banking, consulting, custodial, insurance, investment advisory, legal, record keeping, securities brokerage, third-party administration or valuation of services, among others. Be careful in determining indirect compensation as ERISA has not clearly identified how far to drill down for these compensations of fees. 

Editor: Who are the Covered Service Providers whose fees will be included?

DeSaro: They’re going to be any entity that provides services to the plan.  The final rule defines them as ERISA fiduciary service providers to a covered plan or to a “plan asset” vehicle in which such plan invests; investment advisers registered under federal or state law; and record keepers or brokers who make designated investment alternatives available to the covered plan (e.g. a platform provider). 

Editor: Why will the revelation of these fees come as a surprise to many of the 72 million participants in these plans? What knowledge have they had previously of how severely their pension savings are impacted by these plans?

DeSaro: I believe that these fees are going to come as a huge surprise to many of the participants.   Most participants’ plan statements sometimes disclose small amounts, and many times no amounts, as fees decreasing their accounts. Many participants assume that all of the services rendered to their plan are not paid by the plan. Not only will it be a surprise to the participants, but it will come as a surprise to many of the Plan Fiduciaries that there are fees associated with their plan. When the Plan Fiduciaries review the hopefully now more detailed disclosure of fees from their covered service provider, they can communicate that knowledge to the participants.  This should also help the Plan Fiduciaries compare current Covered Service Provider’s fees with other Covered Service Provider’s fees to get the best benefit for the participants.  The reason for the big push for the 408(b)(2) regulation is to make the plan’s fiduciaries aware of all of these fees that the plan has been paying, be it directly or indirectly.  I believe that it’s going to be a wake-up call to the participants as well. (A survey published by AARP found that 71 percent of those polled believed that they did not pay fees on their 401(k)s.)

Editor: What information will be required to be disclosed? What are Plan Sponsors required to do with the information in imparting it to participants? How do they calculate the charges per $1,000 invested?

DeSaro: Each CSP needs to communicate to the Plan Fiduciary/ Plan Administrator, in some written form, all of the services that they will supply and the compensation expected for each of those services. I believe that upon receiving this information, the plan fiduciary should ascertain that the fees are reasonable.  I believe this assessment should be documented in the plan minutes along with the process used, or any comparisons made to support the reasonableness. The information from the CSP will help the plan fiduciary to provide the required information to the participants later in 2012. The final rule states that CSPs who expect at least $1,000 in compensation for services must adhere to this requirement. Curiously, it doesn’t give any guidance on how exactly to determine the $1,000 threshold. Some persons have speculated that the threshold applies to the life of the contract with the CSP, possibly extending beyond one year.  The rule goes into effect on July 1, 2012.   

Editor: What if the Plan Administrator does not receive the required information? If the CSP refuses to supply the information upon a second request, what recourse does the Plan Administrator have?

DeSaro: If the Plan Administrator does not receive the required information, then the transactions associated with the contract or agreement with the CSP technically will be classified as prohibited transactions as defined by ERISA section 406, and the covered plan would have engaged in prohibited transactions. Those prohibited transactions would be subject to excise taxes and required to be disclosed in a supplemental schedule on the covered plan’s 2012 Form 5500 as well as in the covered plan’s audited statement if the covered plan has an audit requirement. To avoid that situation, the Plan Fiduciary  should make a written request to the CSP for that missing information as soon as possible. If that is unsuccessful, the Department of Labor Employee Benefits Security Administration has posted guidance on its website.  The rule allows for corrections of an error or omission of the required disclosure when the CSP is acting in good faith and diligence.  The correction needs to be made no later than 30 days from the date that the CSP knows of the error or omission. 

Editor: Why is it incumbent on the Plan Administrator to obtain this disclosure information under ERISA Section 404(a)(1)?

DeSaro: This new regulation will assist with compliance under ERISA 404(a)(1), which says that the Plan Sponsor needs to act prudently and solely in the interest of the covered plan’s participants and beneficiaries and for the exclusive purpose of providing benefits and defraying reasonable expenses of administrating the plan.

Editor: The Plan Administrator has a fiduciary duty to see that the expenses are not excessive, which has not been the case in the past.

DeSaro: Yes.  I believe in their defense a lot of these fees have been buried and therefore are not on the radar screen because the fees were not even a line item on the covered plan’s trust statement.  Also, arrangements for how services are provided to the covered plans and how service providers are compensated, such as through revenue-sharing and other arrangements, have become increasingly complex over recent years.  This disclosure is intended to assist the Plan Fiduciaries to bring many of these fees and relationships to light and thus be more transparent as to what the Covered Service Providers are really being compensated for and who they are.

Editor: Is it possible then to uncover conflicts of interests?

DeSaro: Absolutely. Many of the CSPs have agreements with other organizations, and it is hard for the plan fiduciary to keep track of all of the players. The arrangements have become increasingly complex. The new regulations will help bring to light these subtle arrangements that were happening behind the scenes. The results hopefully will help uncover any conflicts of interest.

Editor: What new burden do the disclosures under this new rule place on Plan Administrators and employers?

DeSaro: The 408(b)(2) burden first lies with the CSPs to get the fee disclosures to the plan fiduciary.  Then the plan fiduciary needs to maintain those disclosures of fees to determine that they are reasonable.  The final rule notes that the fee disclosure information does not have to be a formal agreement and can be in electronic form. The plan fiduciary or administrator needs to make sure that the information is clear and understandable.  I recommend the plan fiduciary document this process in their covered plan minutes.  He or she, in turn, needs to pass along this information to the participants of the covered plan.  There is a participant level disclosure requirement under 404a-5 that follows the effective date of 408(b)(2) regulation of 60 days after the effective July 1, 2012 date.  The 404a-5 regulation requires the Plan Sponsor to disclose to the participant plan-level and investment-level information (including fees and expenses).

Editor: A survey by the Government Accountability Office in April 2012 found that half the sponsors of such plans either did not know if their participants paid management fees, which make up 84 percent of total 401(k) expenses, or thought the fees were waived. What should Plan Sponsors do to educate both themselves and their employees? Is your firm available to make presentations to your clients about how much the effect of these fees can impact their 401(k)s?

DeSaro: Plan Sponsors need to take a more active role by reading and understanding the information provided by the CSPs.  If it is not clear, ask questions to make sure that the disclosures are adequate, thus educating themselves as well as their participants.  They should document their findings and discuss these items in their plan committee meetings.  They should attend seminars or webinars on this topic.  Our firm takes a very active role in educating our clients on this subject as well as others.  We are always available. I am very proud that EisnerAmper, LLP reaches out to educate our clients and non-clients through seminars and webinars on various topics, from changes in the laws and regulations as well as best practice ideas and many more issues.  See our website,, for further information.


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