Retirement plan sponsors are the first, and most important, line of defense in providing employees with well-managed retirement savings plans.
Regulations & Compliance
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3 min read
If you offer a retirement plan to your employees, whether you know it or not, you are a retirement plan sponsor and as such, you are required to take certain actions and meet specific responsibilities. As a retirement plan sponsor, there is a tangled web of ongoing responsibilities related to your receipt of annual disclosures and performance of due diligence. Market volatility makes it critical for retirement plan sponsors and covered service providers to develop and maintain investment due diligence procedures and supporting documentation.
While each of these various requirements and responsibilities carries an alpha-numeric code that references the specific section of the Employee Retirement Income Security Act (ERISA) or IRS Code, here are some basic standards of conduct that will give you an understanding of the responsibilities to the plan and its participants.
Plan-level Fee and Service Disclosure
In 2012, regulations were passed that require all covered service providers (CSPs)—defined as a provider associated with your retirement plan who expects at least $1,000 in direct or indirect compensation for services related to your plan—to provide you with an annual disclosure. Specifics include:
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All CPSs are now required to disclose all compensation received in connection with your plan for both direct and indirect sources of revenue.
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Tremendous downward pressure on overall fees as a result of plan sponsors openly comparing the total compensation for each CSP to what is available in the open market has translated to lower fees for plan sponsors and their participants.
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Provided services must be clearly defined.
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The misleading notion of a “free plan” or “free services” has been all but eliminated.
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CSPs include a wide variety of groups such as your recordkeeper, investment advisor, custodian, TPA, auditor, and managed account providers, among others.
These new disclosure requirements also place an additional responsibility back on the plan sponsor. Plan sponsors should take a moment to ask themselves the following questions to make sure they’re covered:
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Have you confirmed receipt of these disclosures each year? While many CSPs will send you the document directly, some will only provide you with instructions on how to access it on your own.
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Have you documented review and understanding of the disclosure’s contents?
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When was the last time you benchmarked the fees and services for your plan?
As a responsible plan sponsor, receipt of this information now requires you to take action to document your review of the contents and that the information contained in these disclosures is “reasonable.”
Participant-Level Fee and Service Disclosure
Disclosures are now also required at the plan level. In addition, regulations were also passed to increase the level of information that is disclosed to plan participants. These new disclosures provide a level of detail previously unavailable to participants. Participants are now required to receive:
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A detailed accounting of plan-related expenses and the associated services provided. These will include any fees that are assessed against participant accounts for administration of the plan, regardless of whether they are assessed globally against all participants or the result of a participant-initiated action, such as a loan.
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A disclosure of all investment-related expenses. These values must be expressed as both a percentage of assets invested and a dollar amount for each available investment option. These are presented in a format to compare against relevant benchmarks for both expenses and performance.
Not surprisingly, the few who do take the time to review this information are typically those with the largest account balances and/or those with the “loudest voice.” As a result, there has been an increase in the number of court cases and litigation surrounding plan fees and investments in the time since these regulations were put into effect.
While those providers associated with your retirement plan have very likely complied with the letter of the law and have delivered all required disclosures, there is still work to be done. Having a service provider who is in compliance with the rules and regulations does not mean that the plan sponsor has fulfilled their role in ensuring they are doing their part. Documentation of ongoing review and due diligence is the key to any successful retirement plan.
To learn how to properly evaluate retirement plan investment advisors, get a copy of the Advisor Due Diligence Evaluation form here.
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