On July 16, 2010, the Department of Labor issued a final ruling on the new fee disclosure rules for defined contribution plans (e.g., 401(k) plans) and defined benefit plans (e.g., pensions). The regulations, under Employee Retirement Income Security Act (ERISA), are aimed at increasing plan sponsor and plan participant understanding of the fees they each pay, and increase the roles and responsibilities their service providers play. There are three parts to the new rules:
Section 408(b)(2) of ERISA
Requires service providers (e.g., record keepers, Third Party Administrators, Investment Advisers, Custodians, etc.) to disclose the services they are providing to the plan, the fees they are charging for these services, if they are acting in a fiduciary capacity, and any conflicts of interest they have in acting in their contracted role. These disclosures must be made to the plan sponsor on an annual basis. This rule becomes effective on April 1, 2012.
Section 404(a)(5) of ERISA
Requires that plan sponsors disclose, on a quarterly basis, the costs that each participant is paying for plan services from their account balances in dollar and cents terms. It also changes how investment costs are disclosed and presented to participants. Each investment option must disclosure the investment’s annual cost in terms of dollar and cents for every $1,000 invested. It also requires that plan sponsors report the plan investment options performance in a more user friendly format to help participants better understand the cost/benefit of each investment option. This rule will go into effect 60 days after 408(b)(2), or May 31, 2012.
Schedule C of Form 5500
Requires plan sponsors with more than 100 participants to disclose additional information about fees that are being paid to the plan’s service providers. This rule has been in effect since 2009.
Business owners must now look at their 401(k) plans each year, just like they do their health insurance. You need to make sure you have processes in place to review your vendors and that you act on these processes. You will need to have tools available to ensure that the fees and services you are receiving are reasonable, and you will need to document your research.
Once the fees are disclosed to the participants, be prepared for direct questions from your employees. Plan participants will likely demand to know how long they have been paying these fees. If you have a high cost plan, you might even face lawsuits from your employees. Some employees might choose to stop participating in the plan. If you are not a “Safe Harbor Plan” this could affect your Actual Deferral Percentage and Actual Contribution Percentage testing. This could limit the amount of contributions you can make to your plan.
On April 1, 2012, the dirty laundry will be printed on paper for everyone to see. Taking the time to review and update your plan before these new rules go into effect can save you time and money from the almost certain wave of employee complaints and possible lawsuits.
At Henssler Financial we believe you and your business should Live Ready. If you would like your business’ 401(k) plan to be ready for the rule changes, contact the experts at Henssler Financial at 770-429-9166 or e-mail at experts@henssler.com. We will be glad to help.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
