A New Year’s resolution for fiduciaries

Too many 401(k) sponsors are not aware of their ERISA obligation to evaluate plan fees and expenses.

By Eric Droblyen | December 30, 2014 at 08:13 AM

I have always liked New Year's resolutions. They are a great excuse for ending bad behaviors or starting good ones.  Here's one for all small business 401(k) sponsors: "I will evaluate my plan fees for reasonableness." 

Let me explain why …

ERISA requires 401(k) sponsors, and any other fiduciary, to ensure that the services provided to their plan are necessary and that contracts or arrangements for services, and the cost of those services, are reasonable. Failure to do so can result in personal liability for the responsible fiduciary.

Too many 401(k) sponsors are not aware of their ERISA obligation to evaluate plan fees and expenses. And even fewer know how to prove fees for plan services are reasonable.

Here are three simple steps that will help you evaluate 401(k) fees in 2015: 

1. Confirm receipt of a 408(b)(2) disclosure for each "covered" service provider. The DOL's Section 408(b)(2) rules require service providers to provide 401(k) sponsors with the information they need to assess the reasonableness of provider compensation and identify potential conflicts of interest.

For purposes of the 408(b)(2) regulation, a Covered Service Provider (CSP) is a person or entity who enters into a contract or arrangement with a plan and reasonably expects to receive $1,000 or more in compensation for providing services to a plan. There are four categories of CSP. These categories are described on the DOL website.

If a CSP fails to provide the required 408(b)(2) information, the contract or arrangement between the plan and the CSP is prohibited by ERISA, and the responsible plan fiduciary will have engaged in a prohibited transaction. In other words, while CSPs are required to provide a 408(b) disclosure, it's the plan sponsor's responsibility to ensure it's received.

2. Examine each 408(b)(2) disclosure for adequacy. CSPs must include the following information in their 408(b)(2) disclosure to the 401(k) sponsor:

  • A description of the services to be provided to the plan pursuant to the contract or arrangement.
  • Whether or not the CSP serves the plan in a fiduciary capacity.
  • All "direct" and "indirect" compensation the CSP, affiliate, or a subcontractor reasonably expects to receive in connection with the covered services. Direct compensation means fees paid directly from the plan.  Indirect compensation means fees paid from any source other than the plan or the plan sponsor (e.g., "revenue sharing").
  • A description of any compensation paid between the CSP and related parties.

More information regarding 408(b)(2) disclosure requirements can be found on the DOL website.

Complete your profile to continue reading and get FREE access to BenefitsPRO, part of your ALM digital membership.

  • Critical BenefitsPRO information including cutting edge post-reform success strategies, access to educational webcasts and videos, resources from industry leaders, and informative Newsletters.
  • Exclusive discounts on ALM, BenefitsPRO magazine and BenefitsPRO.com events
  • Access to other award-winning ALM websites including ThinkAdvisor.com and Law.com
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.

By Scott Wooldridge | May 21, 2024

The Saver's Match program offers a 50% federal match on the first $2,000 of retirement savings for low-income workers, but the industry needs to educate employees how to take advantage of the program, says a new report.

Saver's Match: New SECURE 2.0 program could close the wealth gap in 401(k)s

By BenefitsPRO editors | May 21, 2024

For the third year, the BenefitsPRO LUMINARIES Awards will shine a spotlight on the individuals and organizations that are leading the way and impacting the benefits industry where it matters most.

BenefitsPRO LUMINARIES nominations now open!

By Scott Wooldridge | May 20, 2024

Asset manager BlackRock has launched LifePath Paycheck, which gives employees access to guaranteed income through a target date fund, allowing DC plans to switch some of an enrollee's investments into an annuity at age 55.

Paycheck for life? New guaranteed income offering may be a 'gamechanger' for 401(k)s
A Complete Guide to Today's Care Crisis link

Guide

Sponsored by Trustmark Voluntary Benefits

Equip yourself for long-term care conversations with your clients by diving into the complexities of today’s long-term care crisis. This comprehensive guide explores its causes, impacts, and potential solutions.

C-Suite Broker Relationships and Cost-Containment Survey Results link

Report

Sponsored by Imagine360

We interviewed ~100 executives -- they had a lot to say about their brokers. Explore insights into C-suite broker relationships and cost containment strategies in this report.

Increase Your Value as An Advisor link

Article

Sponsored by ArmadaCare

Learn how Ultimate Health can be used as a powerful tool to open doors, stand out from the competition and solve clients’ top HR challenges related to coverage, retention, recruitment and compensation.