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401(k) Fees: The Next Big ThingPosted by SEP-SOLO-IRA-401k-ROTH on: 2007-03-08 15:05:32 in category:
401(k) [ Print | Permalink / 0 Comment(s) ] By Fred Reish In recent years, 401(k) fiduciary litigation has focused on company stock investments. However, in 2006, that changed. The new litigation focus is plan fees and expenses. The analysis of fees and expenses obviously includes the actual charges being made to plans, but it also includes understanding and evaluating who receives the benefit of that money and the services they provide to the plan. The money trail includes indirect payments, such as finder's fees, 12b-1 fees, and transfer agency fees. The recipients may include advisers, plan providers, recordkeepers, broker-dealers and third party administrators. A fiduciary who does not understand those concepts, and has not quantified the charges made to his plan, as well as the compensation of all the parties involved, is living dangerously. This column focuses on the basic steps that fiduciaries need to take to protect themselves and, of course, to best serve their beneficiaries the participants. As a starting point, let's look at what the DOL's ERISA Advisory Council said in 2004. After a series of hearings, the Advisory Council repeated: The Advisory Council makes the following recommendations in an effort to further educate plan sponsors and fiduciaries: * Plan sponsors should avoid entering transactions with vendors who refuse to disclose the amount and sources of all fees and compensation received in connection with plan. * Plan sponsors should require plan providers to provide a detailed written analysis of all fees and compensation (whether directly or indirectly) to be received for its services to the plan prior to retention. * Plan sponsors should obtain all information on fees and expenses as well as revenue sharing arrangements with each investment option. Plan sponsors should also determine the availability of other mutual funds or share classes within a mutual fund with lower revenue sharing arrangements prior to selecting an investment option. * Plan sponsors should require vendors to provide annual written statements with respect to all compensation, both direct and indirect, received by the provider in connection its services to the plan. * Plan sponsors need to be aware that with asset-based fees, fees can grow just as the size of the asset pool grows, regardless of whether any additional services are provided by the vendor, and as a result, asset-based fees should be monitored periodically. * Plan sponsors should calculate the total plan costs annually. That advice is consistent with the DOL's interpretation of ERISA's fiduciary responsibilities. The DOL has a long-held position that fiduciaries have an obligation to know, understand and evaluate all of the fees and expenses being charged to the plan. In that regard, the DOL stated in its Advisory Opinion 97-16A: ... the responsible Plan fiduciaries must assure that the compensation paid directly or indirectly by the Plan to [the provider] is reasonable, taking into account the services provided to the Plan as well as any other fees or compensation received by [the provider] in connection with the investment of Plan assets. The responsible Plan fiduciaries therefore must obtain sufficient information regarding any fees or other compensation that [the provider] receives with respect to the Plan's investments in each... Fund... to make an informed decision whether [the provider's] compensation for services is no more than reasonable. While the DOL guidance refers to providers, it also applies to any other person or entity that provides services to a plan, such as investment advisers or financial advisers. Unfortunately, it is easy for the DOL to say that ERISA requires that fiduciaries obtain all of the information on fees and expenses, but it is difficult to actually do that. In fact, it is hard to even figure out the right questions. However, the recommendations made by the Advisory Council can be re-written as questions and then submitted to each of the plan providers, advisers and service providers for answers. A good adviser can help the plan fiduciaries prepare and submit the questions and then evaluate the answers. Any U.S. federal income tax advice contained in this communication (including any attachments) is neither intended nor written to be used, and cannot be used, to avoid penalties under the Internal Revenue Code or to promote, market or recommend to anyone a transaction or matter addressed herein. More retirement articles at http://www.reish.com/ �© 2007 Reish Luftman Reicher & Cohen. All rights reserved. The ADVISER REPORT is published as a general informational source. Articles are general in nature and are not intended to constitute legal advice in any particular matter. Transmission of this report does not create an attorney-client relationship. Reish Luftman Reicher & Cohen does not warrant and is not responsible for errors or omissions in the content of this report. |
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