While most experts agree that the 408(b)(2) fee disclosureregulations will have more far-reaching implications thanparticipant fee disclosure rules, plan sponsors do need to keepabreast of what they need to reveal to plan participants beginningAug. 30. And it isn't going to be easy— especially in light of theU.S. Department of Labor's renewed push to redefine the definitionof fiduciary.

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Chad Parks, CEO and founder of The Online 401(k), believes theregulations that relate to plan participant fee disclosure haven'tgone far enough.

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“I'm kind of disappointed in them. The promise was that finallyfee disclosure is here; participants will have a line item aboutservices provided and how much they are paying for that,” he says.“It stopped short of that. It is broken down by investments,administration and record-keeping for the whole plan. It isn'tbroken down like that for employees.”

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He adds that only if a plan uses revenue share to help pay forsome of the recordkeeping and administrative costs would it berequired to give notification to participants that that actuallyhappened. “It doesn't say how much, what is your portion, there'sno breakdown of what your costs are,” he said. “In my mind, that'snice and all, but that's not really going to do individualemployees any good.”

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In this era of litigation, plan sponsors have to make sure theyare doing their due diligence. Even if plan providers are givingthem everything they need to inform plan participants about fees,it is still up to the plan sponsors to benchmark those fees andmake sure they are balanced and in line with other company fees,says Steven Friedman, chair of Littler Mendelson's employeebenefits and executive compensation group in New York.

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“The interesting thing about the lawsuit activity taking placeis that plans that were set up conventionally were found to beadopting processes that violated fiduciary standards. That hasshocked plan sponsors into thinking about whether they need tochange how they do business,” Friedman said.

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Legal precedent

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A decision in Tussey v. ABB Inc., which was handed down inMarch, slapped an equipment manufacturer with a $35 millionjudgment because the company and everyone involved with choosinginvestments for the company's 401(k) plan had breached theirfiduciary duty. They “never calculated the amount of therecordkeeping fees paid to Fidelity Management Trust Company viathe revenue sharing arrangements it had with ABB plan investments,”according to law firm King & Spalding.

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The court also found that the ABB fiduciaries didn't investigatethe market price for similar recordkeeping services and didn'tbenchmark the cost of recordkeeping fees prior to entering into therevenue-sharing arrangement with Fidelity, the law firm stated.

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The Tussey case was the one that made most plan sponsors sit upand take notice that the way they were doing business had tochange, Friedman says. In his business, Friedman sees a lot ofemployers who are very interested in making sure they have aninvestment policy statement that is not going to get them introuble.

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“They can get you in trouble if they contain the right languagebut your committee doesn't follow it. It also can get you introuble if it is so weak that it doesn't say anything at all, interms of giving the committee guidance,” he says. “Committees haveto be careful what they put in policy statements.”

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Friedman also found that employers are very concerned with howthey conduct the investment committee meetings in which theyevaluate investments.

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“This recent case has made it clear that they must follow theirinvestment policy statements and must have appropriate expertise onthe committee to make [prudent judgments]. Oftentimes we don't seethe right type of people on committees for that type of decision tobe made. We are seeing an awful lot of folks revisiting theirpractices,” he says.

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When it comes to plan participant fee disclosures, Friedman saysthat they may be a “bit unfair because plan sponsors often don'thave the information at their disposal to determine whetherdisclosure is full and accurate. However, under ERISA, it is quiteclear that it's the named fiduciary, which is always going to bethe plan sponsor, who has the responsibility to make certain thesecompliance items are completed in the right way,” he says.

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It is up to plan sponsors to determine if any changes areneeded, but in most cases, they don't “have a good perch to viewwhether the information is complete and accurate and that's exactlywhat they have to do to make sure they don't get themselves in anyhot water,” Friedman says.

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He expects there will be more lawsuits stemming fromparticipant-level fee disclosures than from plan disclosures thatwent into effect July 1 because the “relationship between employersand employees has been fraying over the last few years and it isnot getting any better under current economic circumstances,” hesays.

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The battle begins

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Fred Reish, partner and chair of the financial services ERISAteam at Drinker Biddle & Reath LLP, doesn't believe that theparticipant disclosures will result in revolutionary changes, buthe notes that there are some provisions in the regulations thatwill raise some eyebrows.

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Most high-quality plan providers already give participants 90 to95 percent of the information that is required under the newregulation, Reish says, so for the most part those rules alreadyare being satisfied. Participants already are provided informationabout the expense ratios of their mutual fund investments, so“while some people expect that participants will demand lower costfunds, I don't think so because they have already been receivinginformation about expense ratios for many years.”

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What is new is that participants will receive quarterlystatements from their employers telling them about other chargesthat are directly assessed against their retirement accounts, likeinvestment advisory fees, accountants' fees, legal andrecordkeeping fees. “I suspect that those charges will attract mostof the participants' attention…and, perhaps, their concerns andobjections,” Reish says.

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He advises plan sponsors to do the best job they can, as soon aspossible, to explain to participants the types of charges they willbe seeing on their quarterly statements and the reason for thosecharges.

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“For example, the plan might hire an investment advisor toassist the plan committee in selecting the investment options forthe plan. That inures to the benefit of the participants, sincethey should end up with higher-quality, lower-cost investments.However, if they have not been educated on the reasons for thepayments to the investment advisor, they may object to seeing apayment to someone who they do not know and whose services they donot understand,” he says.

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Parks believes the changes will be good, or at least will getthe ball moving in a better direction, but he said he is stilldisappointed the regulations don't delve deeper and make thedisclosures more applicable to individuals.

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He admits that coming up with a system to benchmark all planfees against each other would be difficult, particularly sinceevery plan and every provider tracks things differently. But thatsaid, plan sponsors need to be able to show that the fees they arepaying are fair and reasonable as part of the new regulations.

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Depending on how the industry reacts to the fee disclosures andif the industry is able to measure real change in the fees beingcharged to 401(k) plans, Parks hopes the Department of Labor willrevisit participant-level disclosures and take them as far as hethought they would this time. 

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