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All You Need to Know About 401k Fee Disclosure to Service Providers

401k Fee Disclosure in a Nutshell

Unless a Covered Service Provider (CSP) provides timely and very specific information to the Responsible Plan Fiduciary (RPF), the contract with the service provider will be deemed an ERISA prohibited transaction under the new 401k fee disclosure regulations. If a CSP does not fullfil its obligation to provide these disclosures, the RPF will be required to terminate its relationship with the CSP.


Significant Consequences for Non-Compliance with 401k Fee Disclosure Requirements

Unless the 401k fee disclosure requirements are complied with, the arrangements between the CSPs and the plans they service are treated as non-exempt prohibited transactions under ERISA and Section 4975 of the Code. This means that the arrangements may be rescinded, the compensation paid to the service provider in connection with the arrangement may be returned and excise taxes imposed on the parties involved in the arrangement.

Additional liability can be seen in a recent class action resulting in an employer owing $35 million because of an ERISA fiduciary breach. Click here to read more about this case.


What Must Be disclosed?

You need to proactively reach out to your CSPs to make sure they provide the following information as there are severe consequences for not providing timely 401k fee disclosure updates. If the required 401k fee disclosures are not provided after requesting them from your CSP, the regulations mandate that the Responsible Plan Fiduciary notify the DOL and terminate the services of the provider.

1. Description of the services to be provided. The description of services should be clear and understandable. The 401k fee disclosure should describe all of the services provided for the fees charged and should present sufficient detail to the fiduciary; allowing them to make an informed judgment and to identify any potential conflicts of interest.

2. Status as a Fiduciary. The status of a service provider is determined by the actual functions, authority, and responsibilities they perform for the plan. Notwithstanding their actual status, the service provider must state, affi rmatively, in writing, whether or not they will be performing services as an ERISA fi duciary or a Registered Investment Advisor.

3. 401k fee disclosure of all direct or indirect compensation received. A CSP is required to disclose comprehensive information about direct and indirect compensation that it is expected to receive for services provided to the plan. The regulations also require an explanation regarding the manner in which the compensation will be received; that is, whether the plan will be billed or the compensation will be deducted directly from the plan’s accounts. Direct compensation is compensation received directly from the covered plan or directly from participant accounts. This includes compensation that is initially paid by the sponsor and reimbursed by the plan later. Indirect compensation is compensation received from any source other than the covered plan, plan sponsor, the CSP, or an affi liate. The CSP must also identify the services being provided in exchange for the compensation. In addition, the CSP must identify the arrangement between the payer of the compensation and the CSP. By analyzing this information, the Responsible Plan Fiduciary should be able to identify any confl icts of interest.

4. Any related party compensation if set on a transaction basis, or charged directly against plan’s investment and refl ected in net value of investment.

5. Any termination compensation, including how any prepaid amounts will be calculated or refunded. If, for instance, the service provider charges in advance of the period of service, the method used to calculate a refund, if any, must be described.


What Should You Do to Comply With the 401k Fee Disclosure regulations?

As a fiduciary for your plan, you will need to review and understand the disclosures you will receive. The regulations make it your responsibility to ascertain whether or not the fees and expenses that your plan is paying are fair and reasonable in light of the services you receive.


The following is a short list of items to consider when preparing for fee disclosure:

  • Determine who in your company is the Responsible Plan Fiduciary.
  • Determine which plans are covered plans and who are covered service providers for these plans.
  • Inventory any service agreements you have received. If you can’t fi nd them, you may want to ask now and not wait until after July 1, 2012 the effective date of the disclosure rules.
  • Establish procedures to track receipt of disclosures and evaluate the completeness of the information contained therein.
  • Establish processes to request additional information, if necessary.
  • Review your plan’s investment line-up to be sure it is in good shape for participant disclosure that will occur in October, 2012.
  • Determine how you will evaluate the information that will be disclosed. Many are considering benchmarking their plans. There is a whole new crop of industrious people working feverishly to create companies to provide benchmarking services. Here is what you should know: The databases needed to fairly benchmark retirement plans are not yet populated with enough information to draw immediate conclusions about price fairness. In time, they may be. However, in the short term you should not reach conclusions based solely on a benchmark survey you receive. If you are truly concerned about your fees, you should engage a professional to request alternative proposals. In that way, you will be able to ascertain what the current pricing for your plan should be and perhaps negotiate a better price with your current provider.
  • Document, in writing, trustee meetings, benchmarking, and provider reviews.


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Arthur Grutt