Thanks to regulations issued by the Department of Labor, employers and employees will gain a much better understanding of the behind-the-scenes workings of 401(k) and other defined contribution plans. The goal of these new regulations is to help plan sponsors and plan participants make better decisions when selecting and managing investments.
The rule regarding fee disclosure from service providers to employers that sponsor 401(k) plans was scheduled to take effect July 16, 2011; however, the effective date has been delayed until Jan. 1, 2012.
401(k) plans have been notorious for hiding fees and sometimes charging excessive fees for services that are not received. This negatively affects the performance for the plan participants. This rule places more requirements and responsibilities on plan service providers. It should provide plan sponsors with the information they need to make educated decisions, when selecting and monitoring vendors for their plans.
A plan sponsor can either choose individual trustees—usually the owners or officers in the case of a small business—or a single institutional trustee, such as, an affiliate of a bank, insurance company or other financial institution. Under the new fee disclosure rules, the trustee is going to be responsible for determining that fees paid to the vendors are reasonable and services the plan pays for are being performed. Trustees will have more work to do, or they might need to hire someone to assist them.
When you talk about vendors, who are you talking about?
Plan Providers
Plan Providers are generally the company that offers the 401(k) platform, participant education and the supporting websites for plan participants, for example, John Hancock or Principal.
Third-Party Administrators
Third party administrators are responsible for determining who is eligible to participate in the plan. They determine what benefits are due, and respond to benefit claims and appeals. Plan administrators also have responsibilities that include Department of Labor compliance and work with IRS requirements.
Financial Adviser
Most plans have a financial adviser, which can be a Registered Investment Adviser (RIA) or broker, who directs the investments for the plan. The Financial Adviser may or may not share the trustee’s fiduciary duty. The fiduciary is the person who exercises discretionary authority or control over the management of the plan or its assets.
Custodian
The custodian is the company that holds the plan’s assets.
As a plan sponsor and trustee, how do I know what I am paying my vendors now?
It can be very difficult to know exactly what your vendors make on your 401(k) plan, as most fees are hidden in the fund expenses or additional asset charges. Plan Providers, generally, get paid the bulk of their money from mutual fund companies for making their funds available on their platform. This is known as revenue sharing. Third-Party Administrators are usually paid by the plan sponsor. The Financial Adviser can be paid a number of ways. If your plan’s adviser is a broker, the broker may receive commissions or wrap fees. If your adviser is an RIA, the fee must be fully disclosed in the contract.
At Henssler Financial, we offer services to help plan fiduciaries monitor their investments and plan cost. We offer business owners a range of services, starting with a one-time plan review and benchmarking to a comprehensive 401(k) management program. If you would like to know more about these services, you may call us at 770-429-9166 or e-mail us at experts@henssler.com.