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By Nathan Peck | MiBiz
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GRAND RAPIDS — Federal rules on fee disclosures for 401(k) plans are potentially opening up employers to questions about the administration of their retirement benefit programs.

The Department of Labor rules go into effect for employers at the beginning of their 2012 plan years. The rules require that plan sponsors disclose the fees that participants pay to brokers, third-party administrators and investment advisers, and then determine if those fees are reasonable.

Lawsuits over the fees drove the rules change, said Dori Drayton, partner with Plante Moran Financial Advisors. The drive behind the new regulations stems from lawsuits and class action lawsuits from plan participants after they felt they were charged various excessive fees, she said.

“This could be the first time some of these business owners have had these fees laid out before them in black and white,” Drayton said. “The various ways fees can be charged and collected are so convoluted, it really was impossible for small business owners to figure it out. Now it will be laid out before them in black and white, and they now can determine if these fees are reasonable.”

According to Drayton, providers will be required to disclose in writing:

• The types of services provided and fees they “reasonably expect” for all contracts of more than $1,000, including both direct and indirect compensation;
• Any conflicts of interest;
• Plan investments and investment options;
• Fiduciary services provided.

The rule changes will impact small and mid-sized businesses more than larger corporations, as they have the resources to pull data on different plans and to benchmark one plan provider against another, said Drayton. She recommends hiring a third party to evaluate plans and their fees and benchmark them with a peer group of similar firms with comparable services.

“Just because the fees are high, doesn’t mean they are unreasonable if they are receiving a high level of service,” Drayton said. “If they really feel they are not getting the value or service for what they’re paying, business owners have to empower themselves to make change.”

In an environment where stock market performance has hit investors in the pocketbooks, plan participants are taking a harder look as brokerage fees come into sharper relief, said Larry Titley, a partner at Varnum’s employee benefits practice. Plan administrators, not surprisingly, are sharpening their pencils as fees get more attention, he said.

“Everybody who is involved in the design, administration or implementation of plans is affected. People are already coming back and are offering better deals on programs knowing that all of this is out in the open,” Titley said. “Everybody has been feeling the pressure. We have had four bad years in the last 11. The 401(k) plans that were supposed to be a great investment for everyone haven’t had the growth in investments for people who were looking at 25-year projections based on a 7-percent return.”

Drayton recommends companies contact their current plan providers and inquire about their preparations for the new regulations and request a draft of their fee disclosures.

“The second question should be, ‘Is this going to affect my fees?’ These rules will result in more time spent on the providers’ end,” she said. “Some of the larger providers can spread that across many more clients, but it will be a burden on the smaller firms.”

The next call a business owner makes should be to her or his legal counsel, as the fee disclosures will likely result in a new contract between service providers and the plan sponsor, Drayton explained. Knowledge is power, and companies can ill afford to remain in the dark about their fees. She said they should spend time on the issue up front versus opening up their businesses to legal trouble down the line.

“The only exposure is if plan fees are really unreasonably high. The longer you allow (employees) to be exposed to participants in your plan, the more you can open yourself up to future lawsuits,” Drayton said.

The disclosures also make conflicts of interest between brokers and funds clear to plan providers and participants.

“You are going to be able to see which companies are sharing revenues and paying commissions to each other,” she said. “It is going to surprise companies who is sharing revenues, and who is sharing what with whom.”

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TAGS:

• 401k
• department of labor
• dori drayton
• grand rapids
• larry titley