The U.S. Department of Labor (DOL) required service providers to 401(k) and other pension and profit sharing plans that allow participants to direct investment of their accounts to provide new fee disclosures by July 1. The new requirement applies to all mutual fund families that provide record-keeping or brokerage services together with investment platforms for 401(k) plans in addition to investment managers, advisers, record-keepers and administrators, and even to the managers of investment funds that are treated as holding ERISA plan assets.
Information in these disclosures, together with other plan and investment information, must be provided by calendar year plans to all eligible employees and to all former employees and beneficiaries who have the right to direct investments by August 30.
Here are some scenarios plan fiduciaries may have to deal with, and some suggested next steps for each:
1. Nothing was sent by the service provider
This is a serious problem, because it suggests that the provider is not aware of compliance requirements. Fiduciaries should immediately request the required information in writing, and if it is not received within 90 days, must report the noncompliance promptly to the DOL. If they do not do so, the DOL has taken the position that they have caused the plan to enter into a prohibited transaction. The DOL has provided a model notice for this situation, which may be filed electronically. The DOL has also stated that it is necessary to replace a service provider who does not comply with the new rules.
2. Inadequate disclosure was sent
This is a harder case. Service providers must provide the fiduciaries with the listed information, as well as any information requested in order to satisfy reporting and disclosure obligations or to fulfill the fiduciary responsibility provisions of Section 404(a) of ERISA. Any fiduciary in this situation should request the missing or additional information in writing. If there is no response, the fiduciaries must decide whether the disclosure is so inadequate as to be treated as noncompliance and require reporting to the DOL and possible replacement of the provider. The prudent course of action would be to treat materially inadequate information as noncompliance.
3. Good disclosure was provided
Plan fiduciaries must review the information and determine whether the fees are reasonable in relation to the services provided. If they lack the expertise to do this, independent experts should be retained to benchmark the fees and determine their adequacy. If the fees seem high in relation to the services provided, it would be appropriate to renegotiate them or to initiate an RFP. The recent case of Tussey v. ABB, discussed in my last post, was a vivid reminder that services paid through revenue sharing should also be benchmarked and evaluated.
Coordinate with others
The person responsible for importing some of this information into the required participant disclosures -the plan administrator- may be different from the hiring fiduciaries who received the service provider disclosure. Make sure that the administrator receives all service provider disclosures. Responsible fiduciaries should make sure that there are agreed responsibilities and timelines to ensure that the participant disclosures are completed and distributed on time.