For 401(k) Plans and their participants, no issue has received more attention in recent years than the fees charged to participant accounts. This focus on fees has led to increased attention to the reasonableness of fees that are charged by providers, the disclosure of such expenses and potential conflicts of interest.
For sponsors of 401(k) Plans, it can often be a challenge to determine exactly how much is being charged and to make an “apples-to-apples” comparison between providers. This led to the Department of Labor (DOL) to issue the Service Provider Fee Disclosure rules under ERISA Section 408(b)(2) in 2012. Providers of services to retirement plans are now required to provide a disclosure statement to the plan sponsor (employer), detailing the services provided, costs involved, types of compensation received by the provider and fund expenses.
The DOL also wanted participants in 401(k) Plans to have additional information regarding their investment options. Another development is the 404(a) Participant Fee Disclosure Notice. This annual notice is designed to enable participants to make a comparison of investment options, as well as the expenses involved. The notice is required to provide plan information involving the funds available, how to provide investment instructions and expenses. In addition, charts are required that detail past performance, benchmarks and expense ratios.
The two disclosure notices are now a common part of the 401(k) world, but in 2016 the DOL issued final regulations concerning investment advice and whether rendering such advice constitutes being a “fiduciary.” The regulations detail new steps and disclosures that advisors to 401(k) Plans must take to continue meeting the fiduciary exemption. Part of the goal here is to force investment advisors to avoid conflicts of interest, where they may steer participants to investments that benefit themselves vs. the participant.
Looking ahead, the “5500" return for qualified plans is going to be significantly revised over the next few years. A major part of that will be enhanced reporting of fees, via a revised Schedule C - Service Provider Information.