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New 401(k) Disclosure Regulations

Oct 23Andrew Tucker

Wednesday, November 14, 2012.

If you provide a 401(k) plan to your employees, do you know what is supposed to happen by that day?

This is the day that, according to the Department of Labor’s Employee Benefits Security Administration (EBSA), employees must receive their 401(k) statements for the previous quarter (45 days after the end of the third quarter (July through September)).  The significance of this statement is that it needs to reflect the fees and expenses (as a percentage of plan assets) actually deducted from the participant or beneficiary’s account during the quarter.

According to the Department of Labor’s website:

The Department of Labor’s Employee Benefits Security Administration (EBSA) released a final rule in February 2012 that will help America’s workers manage and invest the money they contribute to their 401(k)-type pension plans.  The rule will ensure: that workers in this type of plan are given, or have access to, the information they need to make informed decisions, including information about fees and expenses; the delivery of investment-related information in a format that enables workers to meaningfully compare the investment options under their pension plans; that plan fiduciaries use standard methodologies when calculating and disclosing expense and return information so as to achieve uniformity across the spectrum of investments that exist among and within plans, thus facilitating “apples-to-apples” comparisons among their plan’s investment options; and a new level of fee and expense transparency.

While the plan administrator (the 401(k) provider) must make the disclosures, the employer plan sponsor (the company) has a responsibility to obtain and evaluate the disclosures and determine the “reasonableness” of compensation prior to entering into, renewing, or extending a service provider’s contract.  It is also the plan sponsor’s responsibility to make sure the disclosures are made.

Without these disclosures, the employer plan sponsor and its plan fiduciaries are parties to a prohibited transaction, and they may also be subject to a claim for breach of fiduciary duty under ERISA.  Engaging in a prohibited transaction carries a 15% excise tax of the “amount involved” (likely the service provider’s total fee). The excise tax may increase to 100% of the fees if the disclosures are not corrected within a certain time frame.  Therefore, the plan fiduciary must insist on receiving these disclosures prior to contracting or renewing the current contract with certain service providers.

The Department of Labor (DOL) announced at an April 30 American Institute of Certified Public Accountants conference that plan auditors have a major role in enforcing service-provider disclosures.

Ian Dingwall, chief accountant at the EBSA, suggested that plan auditors call their clients to make certain that they, as plan fiduciaries, have a list of service agreements and know which ones are not in writing by July 1, 2012.  A service agreement that is not in writing is not considered “reasonable” under the DOL regulations, and therefore results in a prohibited transaction.

“You want to be reaching out to your clients to make sure they don’t engage in a prohibited transaction” because they made a service agreement that was based on indirect compensation and was not in writing, Dingwall warned plan auditors.

In addition, he told plan auditors that “it’s critically important that this happen because, frankly, if it doesn’t happen, a year from now you’re going to be informing us that you caught your clients entering into a prohibited transaction.”

If you have not had a discussion with both your plan administrator and plan auditor, now would be the time to call them.

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