401(k): America’s Retirement System

Here come the microscopes

Recognition is growing that employer-sponsored defined contribution plans are the way America saves for retirement. Increased scrutiny of every aspect of the defined contribution system will accompany that recognition. Right now that attention is focused on fees paid from plan assets. A November report by the Government Accountability Office (GAO) calling for better fee disclosure to the Department of Labor and plan participants has sparked calls for hearings in the next session of Congress by the new Chair of the House Education and Labor Committee. The DOL is in the process of promulgating three sets of regulations dealing with plan-paid fees; reporters have written and continue to write numerous articles critical of plan-paid fees; and, fee-related lawsuits are aimed at some of America’s best employers.

A Time of Change
It is not going to be business as usual going forward. I have included the fee-related information being requested by plan participants being represented by the plaintiff’s law firm generating the plan fee lawsuits. I suggest that both plan sponsors and providers review it. I also suggest a careful review of the changes to the Form 5500 as soon as they are finalized. It is likely that the new disclosures imposed by the Form will become a standard part of the fiduciary process even before the revised Form’s first filing date. 

It is also important to recognize that fees appropriate when a plan was initiated or when average account balances were low may not be appropriate as the plan matures and average account balances grow. It is an important part of the process for sponsors to ask their providers periodically whether or not the plan economics have changed, and if so, if the plan is eligible for an improved fee schedule. As always, put a note reporting this conversation in your fiduciary file. If there is an investment policy statement for the plan, and I hope there is, does it include a section dealing with fee monitoring?

A Note for Plan Sponsors
Plan sponsors become employee advocates when they sponsor a profit sharing or 401(k) plan. Because of this commitment, employers will be responsible for shepherding tens of trillions of dollars through their plans in coming decades. However, because this is so much for so many, we have to expect increasing oversight, even if it’s a little uncomfortable. 

But right now, if you have not have reviewed your fees recently, do so!

Requested Fee-Related Information All documents under which the Plan is established or operated, including but not limited to the Plan document, current Summary Plan Description, latest Annual Report, and any relevant trust agreements or contracts; All contracts with service providers, including but not limited to investment managers, administrative services and recordkeeping providers, brokerage services, etc.; All investment guidelines or directives; A list of each mutual fund, collective trust, or investment vehicle in the Plan and provide information on the fees and expenses for each, including trading costs and record keeping expenses; Identification of the operating expense ratio for each fund; Identification of all levels of revenue sharing, including parties participating in revenue sharing and amounts; Identification of the gross yield and the net yield for each mutual fund in the Plan for each of the past five years.