Urgent Employer Action Required on Qualified Plan Fees
Two rules enacted by the United States Department of Labor (the “DOL”) require an employer that sponsors a qualified retirement plan (especially a 401(k) plan) to take immediate actions to protect itself from fiduciary liability under the federal retirement law known as ERISA.
I. Covered Service Provider to Plan Fiduciary
By July 1, 2012, any “covered service provider” to your plan must provide you with written disclosures of any fees that will be received in connection with providing services to the plan. Such fees include “direct fees” and “indirect fees.”
“Covered service providers” may include the following individuals and entities (and others) providing services to your plan:
• Record-keeper or third party administrator
• Investment Advisor
• Provider of professional services (e.g., accountant or actuary)
“Direct fees” are fees paid from the plan. An example of a direct fee is a loan or distribution processing fee charged to a participant’s account.
“Indirect fees” are generally are fees received from any source other than the plan or the plan sponsor. Examples of “indirect fees” include the following:
• Revenue-sharing fees – mutual fund company pays employer’s financial institution compensation for access to financial institution’s investment platform
• Finder’s Fees – mutual fund company pays broker or financial advisor for bringing plan to its platform
• 12b-1 marketing and shareholder services fees
The new rule requires detailed disclosure of direct and indirect fees. A covered service provider that fails to disclose is subject to ERISA and IRS penalties, including a 15% excise tax (growing to 100% if not timely corrected). An employer that fails to request the disclosures if not provided by July 1, 2012 or, after requesting them, fails to notify the DOL, is subject to the same penalties. Further, non-compliance may require the employer to terminate the covered service provider.
II. Plan Fiduciary to Participant and Beneficiary
By August 30, 2012 (for most plans), the plan administrator (that means the employer or a committee appointed by the employer) must disclose certain plan-related and investment-related information to participants and beneficiaries. This rule applies only to participant-directed defined contribution plans (e.g., 401(k) plans and certain profit sharing plans).
The disclosure requirements generally apply to each “designated investment alternative” (typically, a mutual fund). Plan-level disclosures include, for instance, disclosures about administrative and individual expenses charged to accounts. Investment-level disclosures include, for instance, disclosures about 1-, 5- and 10-year performance versus appropriate benchmarks, fees, investment objectives and portfolio turnover.
From the DOL’s perspective, such disclosure is necessary in order to provide participants and beneficiaries with sufficient information to make informed investment decisions. The failure of the plan administrator to provide these disclosures, either directly or through a designee, exposes the plan administrator to claims of breach of fiduciary duty under ERISA. In this regard, it is worth noting that liability under ERISA for such claims is personal.
III. Next Steps
Please contact any member of Wolff & Samson’s Employee Benefits and Executive Compensation Group to discuss compliance with these new rules. There are many nuances and exceptions that may need to be discussed depending upon an employer’s particular facts.