Disclosing Retirement-Plan Fees

HR leaders and plan fiduciaries should begin planning now for regulations that take effect next summer, which require more transparency from service providers of defined-contribution and defined-benefit plans. The unbundling of complex service fees may make it easier for HR leaders to determine whether the costs are reasonable.

Friday, August 6, 2010
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Imagine the reaction of employees when they discover at retirement that the savings they expected to fund their next 20 years will only last 12 years.

It's a scenario facing many retirement-plan participants, says Marina Edwards, a consultant at New York-based Towers Watson, and it's a scenario that helped provide the impetus behind the Department of Labor's recently released rules for disclosing retirement-plan fees.

"When you, as a plan participant, look at all of the fees you have paid through the years and how the payment of fees has eroded your retirement, it's staggering," says Edwards.

Employees are often going to be upset with the plan sponsors, who should have "helped manage and keep those fees low," she says. "This is the stuff that's now going to come to the forefront."

And how.

Just ask Wal-Mart, which was the subject of a class-action lawsuit brought by Jeremy Braden, an employee in Ozark, Mo.

Braden claimed that, by failing to demand institutional rates for the funds, or disclosing details of revenue-sharing deals between the plan vendor and eight other outside firms, Wal-Mart breached its fiduciary duty. The result? Excess fees of $140 million over six years, according to the suit.

"Fee disclosure is important in an industry where fees have been cloaked for far too long," says Ary Rosenbaum, an attorney in New York who specializes in the Employee Retirement Income Security Act.

"Many HR professionals will have sticker shock with fee disclosure because, I assume, many companies were mistaken in the belief that they paid nothing for administration, discounting the wrap fees and revenue-sharing payments that retirement-plan administrators and advisers were receiving," he says.

Pamela Hess, director of retirement research with Lincolnshire, Ill.-based Hewitt Associates, agrees. "A decade ago this was a very different industry. The word 'free' was used a lot back then, but we always said there was no such thing as a free lunch. There is also no such thing as free record-keeping. There are costs and they need to be broken out."

The new DOL rules will require service providers to do just that.

Those rules, says Hess, are "a good thing" -- for HR, as well as for plan participants. "They will give more transparency and consistency in terms of how fees are disclosed which, ultimately, gives them a better ability to understand and negotiate fees.

"Data is good and it's a good thing for companies to have better insight into exactly what's happening." But, she adds: "It might take some getting used to."

Good News for HR

The new rules have been eagerly anticipated for about two years now, says Edwards. "I think people have been looking forward to what this disclosure is going to look like," she says.

The regulations, she says, were prompted in large part as the result of many plans having asset-based fee structures.

"When you have more contributions coming into the 401(k) plans because of new plan designs and you have investment markets that are headed north, the combination of these two things with an asset-based fee schedule can generate a lot of fees that many not be commensurate with the level of services being required," she says.

The result has been lawsuits from plan participants alleging their employers had breached their fiduciary responsibilities because they were not as attentive to the fees being generated through the plan.

As the Wal-Mart case suggests, the impact for some may be significant. The new rules will bring "sunshine to the fee situation," says David Pearson, a partner with the national labor and employment law firm Constangy, Brooks & Smith in Atlanta.

"Currently it is very difficult for an employer who sponsors a retirement plan to determine what compensation service providers are being paid, since the fees and charges for these services are often complex, indirect or bundled," he says.

The Rules

The new regulations are effective July 16, 2011 and will apply to pre-existing contracts or arrangements at that time. The regulations only apply to employer-sponsored defined-contribution and defined-benefit plans; they do not apply to IRAs, SEPs or SIMPLE plans, says Sandra Wheeler, who is in the PricewaterhouseCoopers Human Resource Services practice in Washington.

In addition, the rules only apply to those covered service providers who reasonably expect to receive $1,000 or more in direct or indirect compensation in connection with providing services to the plan.

A covered service provider must provide the required disclosure reasonably in advance of the date the contract is entered into, extended or renewed. For contracts in existence on the effective date of the regulation, the information must be disclosed by the effective date, according to the regulations.

A covered service provider must disclose a change in a required disclosure as soon as practicable, but not more than 60 days from the date on which the covered service provider is informed of the change, absent extraordinary circumstances beyond the service provider's control.

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"It's all about helping people understand how their service providers are making money," says Hess.

Rosenbaum says that plan fiduciaries, after reviewing the fee disclosures, "will have to determine whether the fees are reasonable, in light of what is out there in the 401(k) marketplace -- because the company is responsible to determine whether their fees are reasonable."

"A really large company already knows this stuff," says Wheeler. "This is probably of more benefit to mid-sized and smaller employers that do not have as sophisticated investment team in-house."

"Before this came about," Rosenbaum says, "HR still really didn't know how much they were paying in administration because of these revenue-sharing payments and what it disclosed and didn't disclose. Now they're going to have to be a lot more vigilant to determine if what they are paying for services is appropriate for what they're getting and what is out there in the marketplace."

And, while much about the new rules are good, Pearson says "the disclosures may set a higher standard for an employer's fiduciary duty, which may expose employers to additional risk and require additional effort by employers to comply with the new rules."

Steps to Take

While the burden is on service providers to provide disclosures relative to their fees, there are steps that HR should be taking now to be prepared.

Plan fiduciaries should begin collecting information now, says Rosenbaum.

"You want to make sure that before the regulations go into effect you know who your providers are. And, when you do find out, contact them to find out how they're going to abide by these new regulations," he says.

In addition to the administrative steps that need to be taken, HR leaders should explore new options and opportunities, says Hess. "Once you become less bundled, it opens up more opportunities and more options that maybe you didn't realize were there a year ago. It's a good thing for the industry, a good direction.

"Ask questions -- ask what your options are," she says.

Rosenbaum notes that plan sponsors are not required to "go and find the cheapest provider. They can pay for extra service. Plan sponsors do that and they should still. They should pick a provider they're comfortable with."

But, he adds: "In order to minimize liability concerns they need to determine that what they are paying is proper in terms of what's out there in the industry."

This can present a challenge, Hess admits, because "it's a little ambiguous." There's no right or wrong answer in terms of what's reasonable.


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