408(b)(2) and **404(a)(5) disclosure documents were designed to shed light on fees, but fee details often remain in the shadows.
Since 2012, ERISA rules have required 401(k) providers to disclose fees that are charged to plan sponsors. The rules also require plan sponsors to disclose to participants what they are paying to be in the plan. Yet despite this double disclosure, fees can still be hard to decipher. Many participants aren’t even aware they are paying anything for their 401(k) despite these new notices. According to a 2015 survey, 58% of participants thought their 401(k) was free.
So while more fee disclosure is a good idea, disclosure doesn’t always translate into transparency.
Let’s start with the awkwardly named 408(b)(2) requirements – a.k.a. the Provider Disclosure Report. Each service provider paid by the company 401(k) must provide the report to the plan sponsor. We should note that these disclosures concern only payments “from the plan.” That is, those fees collected from the enrolled employees. The providers sending these disclosures could include advisors, recordkeepers, third-party administrators and custodians.
The Provider Disclosure Report must spell out the services provided, the third party’s fiduciary role (if any) and all forms of compensation. So far so good. The problem is that some payments are more transparent than others.
Direct fees are just that. Transparent. These are fees paid directly by the plan to the third party. Not so transparent are indirect fees, which are deducted from investment fund returns. So despite the disclosure rules, indirect payments are harder to track. “Revenue sharing” is a common indirect payment, and can include 12b-1 fees and shareholder servicing fees. So the revenue generated by mutual fund fees is “shared” with another provider, say a recordkeeper. This can lower the direct fees the plan pays to these same vendors.
Okay, so if we know direct and indirect fees, shouldn’t we be able to tally them up and understand what each provider is costing the plan? Yes. In theory. Unfortunately, there is no standardization when it comes 408(b)(2) disclosure notices. So depending on how the vendor presents their reports, they can be enlightening or confusing.
Some plan sponsors report that these reports look more like a prospectus than a clear explanation of services provided. Bottom line, it remains difficult for plan sponsors to know exactly what the plan is paying to all third parties. It may be especially difficult for small business to devote the staff time required to assemble this information.
Regardless of how they are presented, it is the plan sponsor’s duty to confirm receipt of the required disclosures. But ERISA 408(b)(2) is more than a scavenger hunt for fees. The plan sponsor is required to review their 408(b)(2) disclosures and determine if those fees are reasonable. Plan fiduciaries must review service provider fees and determine if the costs are reasonable for the services provided. This means comparing fees to industry or peer averages. This can be difficult enough when fees are direct and transparent. Throwing in indirect fees that are not clearly disclosed adds another degree of difficulty.
Another facet of the fee disclosure rules is that plan sponsors are also required to disclose the fees to active participants and those eligible to enroll in the 401(k). The plan fiduciaries must provide an overview of the investments available, along with an explanation of fees and expenses that may be assessed against their accounts. Information must be provided so that participants can compare their investments with benchmark data in a “comparative chart” format.
As part of the fee disclosures, investment options must be listed with the total annual operating expenses expressed as both a percentage of assets and as a dollar amount for each $1,000 invested. That may sound like a lot of disclosure. And it is. Yet indirect fees can still be hidden in fund expense ratios, making the cost of certain services difficult for participants to understand.
As a plan sponsor you have a duty to make sure service providers are sending their 408(b)(2) disclosures. If you can't find yours, learn how to request a 408(b)(2) form. And there is a fiduciary duty to ensure the fees are reasonable for the services provided. Not only that, the 404(a)(5) disclosures must be provided to participants in a timely manner.
If you would like to get yourself out of this disclosure loop, you may want to look for a provider that actually takes on responsibility for these functions. At ForUsAll we offer full 3(16) fiduciary services. That means we can reduce your workload and disclosure worries. We manage and send participant notices and disclosures including annual 404(a)(5) notices.
We can also help you understand how the fees you are paying stack up against industry benchmarks. We believe that efficiency and transparency are the best policies. If there are simpler ways to pay each vendor and clearly disclose those payments, then why use the less transparent methods of 12b-1 payments and revenue sharing?
You can get started on assessing your plan’s costs by downloading our fee evaluation worksheet below. This can also help you identify those opaque costs, including 12b-1 fees. We can even craft a low-cost fund lineup that is that is appropriately risked, prudently monitored, and free from revenue sharing and 12b-1 payments. If you need help, don’t hesitate to get in touch!
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