RETIREMENT PLAN COSTS IT’S WHAT YOU DON’T KNOW THAT CAN HURT YOU!!

By Lynne Smith

If you are an employer sponsoring a 401(k) or other retirement plan, or even a participant in such a plan, you would likely agree that figuring out the true costs that impact a plan and the accounts of its participants are confusing, to say the least, as certain costs have historically been netted against investment earnings. Because of this, and the fact that participants often have the mistaken belief that their employer is paying all the costs, and because fees associated with these decisions have a significant impact on a retiree’s nest egg, plan sponsors face increasing levels of fiduciary responsibility with respect to selection of service providers, reasonableness of fees and disclosure of such costs.

The recent economic downturn has had a significant impact on plans not only as a result of reduced investment performance, but also on the behavior of those participating in such plans. Not only have plans seen reduced employee contributions and employers electing to forego making certain discretionary matching and profit sharing contributions, but there have also been record numbers of participant loan and hardship withdrawals taken. With the majority of Americans relying on their 401(k) accounts to fund their retirement, it is no wonder that the Department of Labor (DOL) which regulates such plans, has various initiatives on which it is actively working to ensure protection, compliance and education.

Among these top initiatives is to ensure that the transparency of pension-related costs is improved so that participants have sufficient information to help them in their investment decisions. The complexity of fees is somewhat driven by the complexity of the types of assets that a plan can offer for investment and the fact that there are well over a dozen different types of fees that might be charged by various parties providing services to a plan. Despite the diversity, plan fees and expenses are generally investment- or advisory-related, transactional, or administrative. However, for various reasons plan providers have historically been hesitant to provide a break out of such fees into formats that make understanding them simple for the sponsor and participant.

In an effort to promote informed decision making, the DOL, in a final ruling made in October 2010, will now require additional disclosures be made to all plan participants (irrespective of plan size) beginning in January 2012 for calendar year end plans. Under this ruling, plan sponsors and other related fiduciaries must provide participants with quarterly statements of plan fees and expenses deducted from their accounts and other information needed to enable them to make meaningful investment decisions and understand all of the costs associated with such decisions.

The new regulations require both plan-related and investment-related disclosures to be communicated in formats that facilitate ease and understanding for participants. Examples of plan-related disclosures required to be made include disclosure of general information about plan mechanics, revenue sharing arrangements with providers, and administrative ones, such as accounting, auditing, legal and record keeping fees charged directly to participants’ accounts, and other expenses specific to individual transactions, such as the cost of taking out a loan. Actual dollar amounts deducted from participant accounts must be provided on a quarterly basis. Investment-specific information will also need to be provided for each of the investment options offered in the plan. For investments with a fixed rate of return, the annual rate of return and the term of the investment must be made available. For investments that do not have a fixed rate of return, long-term performance information along with comparable benchmark information must be provided. Operating fees and expenses for each option shown as both a percentage of assets and as a dollar amount per $1,000 invested are required to be disclosed.

Upon learning of these new disclosure requirements, you may be tempted to think that your service providers will handle this for you. While qualified providers are already gearing up to assist you with this process, you should realize the new regulations are focused on “sponsor-to-participant” disclosure, and as a fiduciary, it is ultimately your responsibility to ensure the disclosures are made and compliance has been achieved. You should also be prepared for some surprises and questions from your 401(k) plan participants as many such participants do not understand that they pay the lion’s share of 401(k) plan costs.

For plan sponsors, the transition to comply with the new DOL regulations will undoubtedly result in increased time and effort on their part, but in the long run, the hope is that the enhanced disclosures will lead to more competitive pricing and a more level playing field. At a minimum, it will certainly encourage plan sponsors to act prudently in carrying out their fiduciary responsibilities and selecting qualified providers with reasonable fee structures.

About the Author
Lynne Smith joined Kingery & Crouse in 2004 as a partner in the Accounting and Auditing Department. Lynne has over 20 years of experience, a portion of which she was a shareholder in the accounting and auditing department of a large local firm located in Orlando, Florida. Kingery & Crouse, P.A. is a full service public accounting firm with a staff of 25 dedicated professionals providing tax and accounting services, including audits of SEC companies. You may contact Lynne at (813) 874-1280 ext #224. Find us on the web @ www.tampacpa.com.