Background: Plan fiduciaries (and if you are a frequent reader of this column, you know that all plan-level decision makers are fiduciaries) have always been required to know what fees and expenses are being paid from plan assets and to make sure they are reasonable in light of the services received. It’s pretty hard to argue against the logic of this. 408(b)(2) will make it easier for fiduciaries to do this part of their job.
Why the need? Defined contribution retirement plans, such as 403(b), 401(k), and Profit Sharing can have complicated economic structures under the surface. Even a knowledgeable, well-intentioned fiduciary can have a heck of a time putting together the puzzle pieces to get a clear picture of:
- Who may be receiving direct or indirect payments from the plan?
- What are the sources and amounts of all direct and indirect payments?
- Who is doing what to earn those payments?
- Do any of those arrangements pose a conflict with respect to the interests of the plan’s participants?
By mandating disclosure of the above, the DoL is facilitating the flow of information from providers to fiduciaries so that they can make better informed decisions. That’s the Velvet Glove. The Iron Fist behind it, though, is that “I didn’t know” will be an even less acceptable response during a DoL exam.
Paid by the plan? What do we mean when we talk about costs, fees or expenses being “paid by the plan?” We’re talking about the money that belongs to the plan’s participants – anyone with a balance in the plan, whether they are and active or terminated employee, beneficiary, etc. Examples:
This is money that is being transferred in one way or the other from the plan’s participants to the plan’s service providers. (Any costs being picked up directly by the employer are not subject to disclosure requirements.) It is only fair to note that the plan could not exist without service providers and that they are entitled to reasonable compensation, which is a great segue to the rest of the article.
- A flat charge deducted from all participant accounts, such as $40 per year;
- A balance-based charge deducted from all participant accounts, such as a 1% wrap fee or asset charge; and
- An expense charged against the assets in a particular investment, such as the management and distribution fees of a mutual fund, often expressed as the fund’s “expense ratio.”