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Retirement Fee Disclosures: Are You Ready?

June 21, 2012 - Scottsdale, Arizona - Most of you know by now, that July 1st is around the corner and that is the date new disclosure rules for retirement plans officially go into effect.  On this date, covered plans and service providers are required to disclose to plan fiduciaries information about the services that are provided to them.  In a blog from last year, I talked about the need for employers/plan sponsors to do some planning, and be proactive, relative to these forthcoming regulations.  Remember, there are two sets of disclosure rules.  The WorldatWork Public Policy team released an issue summary on the final rule regarding the obligations of covered service providers, which is the rule that is effective July 1st

In addition, the initial participant disclosures are due to participants by August 30th.   The WorldatWork Public Policy team released an issue summary on the final rule regarding the required participant disclosures.  With this rule, for calendar-year plans, the initial annual disclosure of “plan-level” and “investment-level” information (including plan fees & expenses) is with the first quarterly statement given to plan participants no later than November 14th (the initial disclosures, due by August 30th, must be provided to all participants and beneficiaries who have the right to direct their investments; the initial quarterly statement, due by November 14th, need only reflect the fees and expenses actually deducted from the participant or beneficiary’s account during the July through September quarter to which the statement relates).

By now, you should have determined which plans and service providers are covered by the disclosure rules, and assessed the accuracy and completeness of the service provider fee disclosures to be received.  In addition, you should have discussed with your service providers  who will create and distribute the required participant-level disclosures.  Hopefully, you have been communicating fees and expenses with your plan participants all along, and have an understanding of what you are paying for.  If not, I would imagine you might expect several employee inquires.  Investment management fees?  Expense ratios?  Revenue sharing?  Asset-based fees?  12b-I fees? Shareholder servicing fees? Plan administration fees?....and more…what does it all mean?

Although you may receive the information, how do you know these fees are reasonable for the value of services received?  That is a big part of your fiduciary responsibility.  Remember, you must determine if the fees you have been charged (and subsequently perhaps passed along to participants) are reasonable and in the best interests of participants.  You won’t know this unless a.) you understand all the various fee and expense components for the retirement plan services received; b.) you know what they’re for and how they apply to your specific plan, and c.) you have conducted a benchmarking analysis comparing apples-to apples your plan design features, investment fund line-up, fees & expenses, etc. with other service providers.  Of course, this can be tricky, depending on how your plan is designed.  Do you have a bundled product? Unbundled?  How many service partners are involved?  How do they each pass along fees & expenses? Who pays for what (employer, employee, plan, etc.), and how are fees & expenses paid?

It is recommended that you conduct a retirement benchmarking analysis, on average, every 3 years or so.  Benchmarking creates a standard for plan sponsors and service providers to follow by comparing plan features, investments, and costs against other plans of similar sizes. It helps serve to assist retirement plan sponsors to measure the plan's efficiency and effectiveness, determine the reasonableness of plan fees against peers, and helps identify what can be done to make any needed plan improvements.

Here are a few general tips when it comes to retirement plans:

  • Act prudently in hiring and monitoring service providers;
  • Ensure plan assets are used for the exclusive purpose of paying benefits and defraying “reasonable” expenses;
  • Ensure services are necessary and that no more than reasonable compensation is paid to a service provider;
  • Review and benchmark the plan’s administrative services and investment fees; using an independent third party to obtain a benchmarking opinion is, often, a good way to measure a plan against its peers;
  • Compare and evaluate the number and complexity of services offered between service providers;
  • Rank which services are most important to the plan;
  • Periodically review and document service provider performance & fees;

Here are some resources located in the WorldatWork database on this subject matter that is helpful to the practitioner.  In terms of the two sets of upcoming fee disclosure rules, make sure you understand the disclosures received from your providers, and they are in compliance, and be sure to establish ongoing processes to review and document the steps needed during the preparation of the fee disclosures to participants.

The opinions expressed are solely those of the author and do not necessarily represent those of WorldatWork.

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