With summer nearly upon us, thoughts inevitably turn to backyard barbecues, picnics in the park, weekend getaways and other activities. But while you're off enjoying yourself, please give a passing thought to the less fortunate: retirement plan administrators.
That's right. While you're enjoying some much-needed fun in the sun, retirement plan administrators will be up to their necks in work and worry.
Credit the U.S. Department of Labor's Employee Benefits Security Administration. Two regulations are slated to take effect this summer, both of which will require careful attention from plan fiduciaries.
The first regulation, effective July 1, requires plan service providers to make certain disclosures to retirement plans. Under the Employee Retirement Income Security Act, the federal law governing most private-sector retirement programs such as 401(k), 403(b) and pension plans, payments by retirement plans to providers of administrative and investment services are prohibited unless the services themselves and the fees paid for them are reasonable.
And so it is that plan record keepers, investment advisers, consultants and brokers, among many others, now will be required to disclose the compensation they receive and the manner in which it is paid and describe the services they provide. Many of these providers will be compelled to disclose every last cent they earn from the relationship, while others will need to disclose only those dollars they earn indirectly-that is, from sources other than the plan or the plan's sponsor.
What's so bad about that, you ask? Doesn't the plan administrator simply need to place all these disclosures neatly into a folder and forget about them?
As if. The disclosures are but the first step of an exercise in which the administrator and plan fiduciaries must analyze the disclosures, benchmark them against the fees charged by others for the same services (which will almost assuredly require the engagement of an outside investment consultant), make a determination as to whether the costs are, in fact, reasonable and document that determination.
If the fees are reasonable, the plan administrator can sleep more easily, knowing that ERISA's standards have been satisfied. If they are not reasonable, the administrator and plan fiduciaries must then renegotiate the terms of the arrangement, if not seek out a new service provider altogether.
But remember, there are two regulations taking effect this summer, and after plan administrators have digested the first, they'll quickly be thrown into the task of preparing for the second.
That regulation, effective Aug. 30, requires administrators of self-directed retirement plans-the vast majority of 401(k) and 403(b) plans-to disclose to participants on a regular and periodic basis their rights and responsibilities with respect to any investment in the plan, as well as information related to plan investment options, including fees and expenses. Much as the first regulation seeks cost transparency so that administrators and plan fiduciaries can better evaluate the reasonableness of service providers' fees, the participant disclosure regulation seeks cost transparency so that plan participants can make informed decisions about how their retirement plan contributions are invested.
Specifically, plan administrators must disclose:
1. Basic information regarding plan investment options, methods for giving investment instructions and any limitations that apply to investment instructions;
2. An explanation of any fees and expenses for general plan administration that may be charged to an individual account, and an explanation of how those fees are allocated; and
3. An explanation of any fees and expenses that may be charged to an individual's account based on an individual's actions.
In addition, at least quarterly, the plan administrator must send participants a statement showing the amount of administrative and individual expenses actually charged to a participant's account, as well as a description of those services charged.
Investment-related information includes basic information about each investment alternative and performance data and benchmarks, including fees and expenses for each investment alternative. This information will need to be provided in a chart or similar format designed for comparing investment options. In addition, the disclosure must make reference to a website that gives participants more information about the investment options and a general glossary of investment terms.
While it is true that plan record keepers and investment advisers will offer much-needed assistance with the preparation of these disclosures, the burden remains squarely on the shoulders of plan administrators.
Compliance with the new regulations is really just the tip of the iceberg for plan administrators. In the bigger picture, retirement plan administration has become a more dangerous endeavor than it was just a few years ago, fraught with a heightened risk of liability. In a recent judicial opinion, a federal court dispassionately dissected the acts and omissions of a large company's retirement plan committee, assessed nearly $40 million in damages and laid bare for all to see how difficult it truly is to manage a plan.
That decision brought to the fore some important tenets that must be heeded by plan administrators, even while they review service provider disclosures and prepare participant disclosures:
The importance of good plan governance can never be overstated. Contemporaneous detailed minutes of fiduciary meetings may well be the best evidence of prudent action if a lawsuit is ever brought. Fiduciaries should ensure that investment policy statements and committee charters are followed to the letter and don't contain unnecessary or gratuitous language.
Fiduciaries should always be mindful of their responsibilities under ERISA. Every action undertaken should be viewed through that prism; when in doubt, plan fiduciaries should do what's best for participants and beneficiaries.
If plan fiduciaries don't regularly benchmark record-keeping fees, they should begin to do so. This includes considering how a plan's size can be used to reduce those fees.
Fiduciaries should be sure they are following investment policy statement terms to the letter when selecting and deselecting funds. Given the choice, they should opt for general language over specific language, and should be wary of investment options for which the revenue sharing may separately benefit the plan sponsor. Any analysis involving potential conflicts of interest should be undertaken seriously and cautiously. When choosing between different share classes, care should be taken to document the reasons.
So while you're enjoying that backyard barbecue or that picnic in the park, consider cracking a cold one in honor of retirement plan administrators, for theirs will be a cruel, cruel summer indeed.
Eric Paley is a partner and member of Nixon Peabody LLP's labor and employment practice. Stacy Lawkowski, an associate in the practice, co-authored this article.6/8/12 (c) 2012 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email email@example.com.