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By Karen Gentry | MiBiz
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WEST MICHIGAN — Service providers of 401(k) and 403(b) plans and employers need to be aware of new fiduciary and fee disclosure requirements that will become law this year.

Larry Titley, partner at Varnum LLP and member of the firm’s employee benefits practice group, said the U.S. Department of Labor has increasing concerns about the fees and expenses being charged by mutual fund companies and more disclosure is needed so employees can make better investment choices. He led a seminar in early March on the topic to help HR, finance professionals and other business leaders gear up for the changes.

“Employees need a lot more information about the charges being made to their account for fees and expenses by mutual fund companies and fees many plan administrators are charging,” Titley told MiBiz.

Gone are the days when a majority of employers took all the risk on investments and paid for defined benefit plans. More typical is the 401(k) plan and the 403(b) plans for schools and nonprofits.

“The rules have changed. The risk of loss on investments is on employees,” Titley said. “A lot of time fees and expenses are coming out of the accounts of employees.”

Beginning in July 2011, all the people who provide services to 401(k) plans including administrative, investment, law firms, accountants and others must disclose to the plan sponsor and explain all of their fees. The intended effect is to provide information to employers to make decisions about how to structure the administration of their retirement plans, according to Titley.

The second set of regulations that will go into effect after Nov. 1, 2011 will require plan sponsors (employers) to provide more information to plan participants about all mutual fund choices and administrative fees charged by each of the mutual fund companies.

Titley said a whole gamut of services from administrative, educational and recordkeeping get paid by mutual fund services and those fees have never been broken down. Now they are going to have to explain what they are charging for each of these services.

Some companies offer a bundled approach or one-stop shopping, yet employers need to realize they have options and can use different providers such as one for recordkeeping, one for investments. Titley said this subcontracting may be a cheaper alternative. With the new regulations, employers can decide if they want to stay with the bundled approach or divide it out.

Regarding the second set of regulations, Titley said employers in some cases have been charging fees such as auditing, legal and trustee fees against the fund. With the new regulations, the employer will have to disclose to employees that they are doing that.

“If the employer is paying all the expenses, then they don’t have to disclose,” Titley said.

Any size business that offers a 401(k) plan or 403(b) plan will be required to comply with the regulations. Titley noted there’s going to be some additional costs to employers to comply and noted the Department of Labor has a disclosure document — 4-5 page model form to use as a template for complying with the new regulations.

“Some of the least expensive funds in terms of fees are the index mutual funds, like an S&P index fund,” Titley said. “They typically have the lowest fees — more managed mutual funds have the higher fees.”

He said investors hope for better returns with the managed funds, but that’s not always the case and that’s the kind of information that will have to be disclosed.

Employers must comply with the new regulations or risk being responsible for investment losses. The regulations were designed to give enough information to employees to make responsible investments so they can’t turn around and blame employers for their choices.

“If employees make some stupid investment moves, you’re responsible for those stupid investment moves because you didn’t give me enough information to make intelligent investment decisions,” Titley said.

John Fuger, VP of Investments for Stifel Nicolaus in Grand Rapids, said regulators are trying to achieve a more transparent, competitive market.

“The regulations are going to require additional fee disclosure from service providers to plan sponsors and participants,” Fuger said. “It is designed to provide them the information needed to analyze their plan’s fees to determine if they are reasonable.”

Titley said he is not sure what the impetus is behind the impending law changes, but a series of class action suits in the last four or five years have claimed that employers are allowing service providers to charge what they perceive as excessive fees.

“One law firm in St. Louis (Missouri) is spearheading the claims joined by plaintiff law firms around the country,” Titley said. “Employers are not doing the job of negotiating the fees — not providing the lowest cost mutual funds.”

Companies such as Fidelity, T. Rowe Price, Fifth Third Bank and Chase — any of the major banks and mutual fund companies — are gearing up to provide the required information. The regulations went through a proposed regulation phase with public comment before the final regulations were issued.

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• human resources
• john fuger
• larry titley
• stifel nicolaus
• varnum llp
• west michigan