Not only is there potential fiduciary liability for failure to examine this issue, but also the ERISA Section 404(c) safe harbor (which insulates a plan sponsor from ERISA fiduciary liability) may be negated by a failure to identify and disclose all plan fees and expenses to participants. (Are you at risk of negating your safe harbor status?)
In addition, arrangements with service providers may be considered prohibited transactions under Section 406 if the exemption provided in Section 408(b)(2) is not satisfied, subjecting the plan fiduciaries and the service providers to tax penalties. To satisfy the requirements of this exemption, an arrangement between a plan and a service provider will not be a prohibited transaction if: 1) the contract or arrangement is “reasonable,” 2) the services provided are necessary for operating the plan, and 3) the service provider’s compensation is “reasonable” for such services. Currently, the standard for evaluating what fees are reasonable is unclear, making it difficult for plan sponsors to determine whether a service provider arrangement will constitute a prohibited transaction.
A Ploy Named Sue
This has led to a flurry of ”hidden fee” litigation, reflecting plan participants’ dissatisfaction with inadequate fee-disclosure requirements and the need for protection from excessive fees. Plan participants have filed multiple lawsuits against plan sponsors, claiming that the decision to pay excessive investment and administrative fees was imprudent and a breach of the fiduciary duty of care. (Why not move away from “hidden fee” arrangements and enlist flat fee providers who fully disclose their services to not only protect you, but do the right thing for your employee participants. By using the right provider you may be able to document a higher value service for a lower flat fee…thus removing the “wind in the sails” of participants claiming excessive and imprudent fees etc. If your vendors won’t do this, shouldn’t you find one that models their practice around how you choose to do business rather than requiring you to conform to them, the vendor?)
As a result, employer plan sponsors have hired investment consultants to advise them on the reasonableness and identification of plan investment and administrative fees and expenses. In fact, there is a tendency to rely on such independent advice from outside experts.
Most plan sponsors are unaware of the fiduciary risks they assume. The new fee disclosure regulations, effective January 1, 2012, will increase the clarity of fees as well as increase the lawsuits by employees. Remember, an employee only needs to file a complaint with the Department of Labor. If the DOL finds merit they will file suit on behalf of the employees.
Please comment or call to discuss how this affects your organization.
- Operating a 401k Plan (moneymanager.com)
- Why You Shouldn’t Hire Your Payroll Company To Run Your 401(k) Plan (alliancepayroll.wordpress.com)
- Proposal To Protect Retirees’ Nest Eggs Becomes Latest Lobbying Flashpoint (huffingtonpost.com)