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Pensions & Benefits Law A Discussion of Canadian and U.S./Cross-Border Pension & Benefit Legal Issues

How Will You and Your Benefits Department Respond When Participants Ask About Their 401(k) Fees?

Posted in U.S. Pensions & Benefits Law

After new required disclosures shed light on the murky area of 401(k) plan fees, participants eyes should be opened.

In August 2012, initial fee disclosures with general information were required to be distributed to participants and starting this November, quarterly statements must be sent showing the actual amounts directly deducted from their accounts in the prior quarter. The media is encouraging plan participants to ask questions and to press employers for lower fees, and the U.S. Department of Labor has scheduled a webinar for participants on plan fees on September 13.

Participants are being told to “challenge the benefits department” to improve their plans. How will your benefits department respond when participants ask whether cheaper alternatives are available?

First and foremost, plan sponsors need to understand their fee arrangements and investment options in order to properly handle participant questions and complaints, which means that they need to have fulfilled their fiduciary responsibilities in selecting vendors, reviewing fees, and reviewing the plan’s investment menu. Our recent Osler Update  summarizes what responsible fiduciaries are doing to prepare. Some participants may simply need assistance understanding their statements. We have reviewed a lot of the initial statements, and some are still confusing to read, since the Department of Labor did not prescribe a standard format for this disclosure. However, more than a few participants can be expected to ask WHAT YOU HAVE DONE to determine that their plan doesn’t cost too much.

Here are a few recommendations to prepare for the anticipated participant questions:

  1. Educate yourself. Do you understand all of the different types of fees 401(k) plans have, including investment costs, trustee or custodial expenses, transactions costs such as commissions and administrative and record-keeping fees?
  2. Compare your plan. Do you know the average 401(k) plan expense for plans of your size, and have you used an independent benchmarking service to evaluate your current vendor fees? (Best practice here is not to rely on services recommended by your current vendor.) If you can’t answer “yes” to both questions, how will you be able to respond to questions asking why the plan is so expensive?
  3. Review your investment line up. When was the last time you reviewed the plan’s investment lineup for performance relative to fees, and do you change the lineup when better options become available? This would be a good time to do so if you haven’t looked at your investment lineup recently. Also be prepared to explain that it is appropriate to pay more for better service, such as better than average investment performance. Ask a registered investment advisor who will acknowledge being an ERISA fiduciary for expert help.
  4. Don’t Limit Your Menu to Retail Funds. Do you have index funds and institutional class shares in your lineup to lower investment costs? Have you asked that any minimum investment requirements for institutional share funds be waived?
  5. Examine revenue sharing arrangements with a critical eye. Do you understand that expenses paid through revenue sharing are actually being paid by the participants? Have you picked the best investments for them, not the funds that pay the most revenue sharing and therefore limit your plan sponsor responsibility for fees?
  6. Check out new vendors. Have you done an RFP recently to see whether better alternatives are available? You may love your current vendor, but an even better, cheaper alternative may be available. (And you might be able to use the RFP to renegotiate your current fees without actually switching to a new record-keeper.)

If you are one of the many plan fiduciaries perplexed about how to go about all of this, it is strongly recommended that you seek professional assistance. Your team should include not only your ERISA attorney, but also a registered investment adviser who will acknowledge being an ERISA fiduciary.