Posts Tagged ‘Fiduciary’

Final Ruling to Improve Transparency of Fees and Expenses in 401(k)-Type Retirement Plans

Monday, March 26th, 2012

401k FeesFebruary 2012

The Department of Labor’s Employee Benefits Security Administration (EBSA) released a final rule 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.


  • EBSA is responsible for administering and enforcing the fiduciary, reporting, and disclosure provisions of Title I of ERISA.
  • The agency oversees approximately 708,000 private pension plans, including 483,000 participant-directed individual account plans such as 401(k)-type plans.
  • A “participant-directed plan” is a plan that provides for the allocation of investment responsibilities to participants or beneficiaries.
  • An estimated 72 million participants are covered by these participant directed plans, which contain nearly $3 trillion in assets.
  • While workers in these plans are responsible for making their own investment decisions, current law does not adequately ensure that all workers are given the information they need or ensure that information, when provided, is furnished in a format useful to workers, particularly information on investment choices including associated fees and expenses.
  • In April 2007, EBSA published in the Federal Register a Request for Information (72 FR 20457) soliciting the views, suggestions and comments from participants, plan sponsors, plan service providers and members of the financial community, as well as the public in general, on whether and to what extent rules should be adopted or modified, or other actions should be taken, to ensure that participants and beneficiaries have the information they need to make informed decisions about the management of their individual accounts and the investment of their retirement savings.

Overview of Final Rule

  • The final rule provides that the investment of plan assets is a fiduciary act governed by the fiduciary standards in ERISA section 404(a)(1)(A) and (B), which require plan fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries.
  • The final rule also provides that when a plan allocates investment responsibilities to participants or beneficiaries, the plan administrator must take steps to ensure that such participants and beneficiaries, on a regular and periodic basis, are made aware of their rights and responsibilities with respect to the investment of assets held in, or contributed to, their accounts and are provided sufficient information regarding the plan and the plan’s investment options, including fee and expense information, to make informed decisions with regard to the management of their individual accounts.
  • A plan administrator must provide to each participant or beneficiary certain plan-related information and certain investment-related information. These categories of information are described below.

Plan-Related Information

The first category of information that must be disclosed under the final rule is plan-related information. This general category is further divided into three subcategories as follows:

General Plan Information

  • General plan information consists of information about the structure and mechanics of the plan, such as an explanation of how to give investment instructions under the plan, a current list of the plan’s investment options, and a description of any “brokerage windows” or similar arrangement that enables the selection of investments beyond those designated by the plan.

Administrative Expenses Information

  • An explanation of any fees and expenses for general plan administrative services that may be charged to or deducted from all individual accounts. Examples include fees and expenses for legal, accounting, and recordkeeping services.

Individual Expenses Information

  • An explanation of any fees and expenses that may be charged to or deducted from the individual account of a specific participant or beneficiary based on the actions taken by that person. Examples include fees and expenses for plan loans and for processing qualified domestic relations orders.

The information in these three subcategories must be given to participants on or before the date they can first direct their investments, and then again annually thereafter.

Statements of Actual Charges or Deductions

In addition to the plan-related information that must be furnished up front and annually, participants must receive statements, at least quarterly, showing the dollar amount of the plan-related fees and expenses (whether “administrative” or “individual”) actually charged to or deducted from their individual accounts, along with a description of the services for which the charge or deduction was made. These specific disclosures may be included in quarterly benefit statements required under section 105 of ERISA.

Investment-Related Information

The second category of information that must be disclosed under the final rule is investment-related information. This category contains several subcategories of core information about each investment option under the plan, including:

Performance Data

  • Participants must be provided specific information about historical investment performance. 1, 5 and 10-year returns must be provided for investment options, such as mutual funds, that do not have fixed rates of return. For investment options that have a fixed or stated rate of return, the annual rate of return and the term of the investment must be disclosed.

Benchmark Information

  • For investment options that do not have a fixed rate of return, the name and returns of an appropriate broad-based securities market index over 1-, 5-, and 10-year periods (matching the Performance Data periods) must be provided. Investment options with fixed rates of return are not subject to this requirement.

Fee and Expense Information

  • For investment options that do not a have a fixed rate of return, the total annual operating expenses expressed as both a percentage of assets and as a dollar amount for each $1,000 invested, and any shareholder-type fees or restrictions on the participant’s ability to purchase or withdraw from the investment.
  • For investment options that have a fixed rate of return, any shareholder-type fees or restrictions on the participant’s ability to purchase or withdraw from the investment.

Internet Web site Address

  • Investment-related information includes an internet Web site address that is sufficiently specific to provide participants and beneficiaries access to specific additional information about the investment options for workers who want more or more current information.


  • Investment-related information includes a general glossary of terms to assist participants and beneficiaries in understanding the plan’s investment options, or an Internet Web site address that is sufficiently specific to provide access to such a glossary.

Comparative Format Requirement

Investment-related information must be furnished to participants or beneficiaries on or before the date they can first direct their investments, and then again annually thereafter. It also must be furnished in a chart or similar format designed to facilitate a comparison of each investment option available under the plan. The final rule includes, as an appendix, a model comparative chart, which when correctly completed, may be used by the plan administrator to satisfy the rule’s requirement that a plan’s investment option information be provided in a comparative format.


  • The rule provides plan administrators protection from liability for the completeness and accuracy of information provided to participants if the plan administrator reasonably and in good faith relies upon information provided by a service provider.
  • After a participant has invested in a particular investment option, he or she must be provided any materials the plan receives regarding voting, tender or similar rights in the option.
  • Upon request, the plan administrator must also furnish prospectuses, financial reports and statements of valuation and of assets held by an investment option.
  • The general disclosure regulation at 29 CFR § 2520.104b-1 applies to material furnished under this regulation, including the safe harbor for electronic disclosures at paragraph (c) of that regulation.
  • The final rule would also make conforming changes to the disclosure requirements for plans that elect to comply with the existing ERISA section 404(c) regulations.

Economic Benefits of the Final Rule

  • The Department estimates that the rule will be economically significant.
  • The anticipated cost of the rule is $425 million in 2012 (2010 dollars), arising from legal compliance review, time spent consolidating information for participants, creating and updating Web sites, preparing and distributing annual and quarterly disclosures, and material and postage costs to distribute the disclosures.
  • A significant benefit of this rule is that it will reduce the amount of time participants spend collecting fee and expense information and organizing the information in a format that allows key information to be compared; this time savings is estimated to total nearly 54 million hours valued at nearly $2 billion in 2012 (2010 dollars).
  • Over the ten-year period 2012-2021, EBSA estimates that the present value of the benefits provided by the final rule will be approximately $14.9 billion and the present value of the costs will be approximately $2.7 billion.

Effective and Applicability Dates

  • The July 1 effective date of the final regulation relating to service provider disclosure under section 408(b)(2) will impact when disclosures must first be furnished under the final rule on fee disclosures for participants. The transitional rule for the final rule on fee disclosures for participants was revised in July 2011 so that the first disclosures would follow the effective date of the 408(b)(2) regulation.
  • Consequently, for calendar year plans, the initial annual disclosure of “plan-level” and “investment-level” information (including associated fees and expenses) must be furnished no later than August 30, 2012 (i.e., 60 days after the 408(b)(2) regulation’s July 1 effective date).
  • The first quarterly statement must then be furnished no later than November 14, 2012 (i.e., 45 days after the end of the third quarter (July through September), during which initial disclosures were first required). This quarterly statement need only reflect the fees and expenses actually deducted from the participant or beneficiary’s account during the July through September quarter to which the statement relates.

Contact Information

For questions about the rule, contact EBSA’s Office of Regulations and Interpretations at 202-693-8500.

This fact sheet has been developed by the U.S. Department of Labor, Employee Benefits Security Administration, Washington, DC 20210. It will be made available in alternate formats upon request: Voice telephone: 202-693-8664; TTY: 202-501-3911. In addition, the information in this fact sheet constitutes a small entity compliance guide for purposes of the Small Business Regulatory Enforcement Fairness Act of 1996.

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Legal Disclaimer: This article is intended for informational purposes only and by no means should replace or substitute other legal documents (governmental or non-governmental) reflecting similar content or advice. If you have any questions concerning your situation or the information provided, please consult with an attorney, CPA or HR Professional.

Why You Shouldn’t Hire Your Payroll Company To Run Your 401(k) Plan

Monday, February 28th, 2011

401K AdminBy Ary Rosenbaum, Esq.

In “The Outlaw Josey Wales” Josey, played by Clint Eastwood approaches a man in a bar and asks if he is a bounty hunter (there to kill Josey). The bounty hunter replies, “A man has to do something for a living.” and Josey replies, “Dying ain’t much of a living, boy.”

I have been an ERISA attorney for 12 years and I am always asked by people I meet whether I give financial advice as an advisor and/or whether I do plan administration as a third party record keeper. I tell these people that I do neither, that I stick to what I know as an ERISA attorney. While people may say that being a financial advisor and/or record keeper may be a nice segue from being an ERISA attorney, I believe that these expert positions are so vastly differently that I couldn’t effectively wear more than one hat. I follow a major rule in business; I stick to what I know.

Too often in the retirement plan industry, we have people that claim to be experts that are really hacks in disguise. Too often, inferior work is done. The retirement plan industry is such a highly specialized field; it’s the amateurs that make it extremely difficult for the expert to clean up the mess. While people may have to work as third party plan administrators for a living, being incompetent ain’t much of a living.

In the 401(k) world, the two largest payroll providers in the country feel that retirement plan administration is a natural segue from doing payroll. I respectfully disagree. Providing payroll service is an automated, computerized system that is dependent on getting the correct tax rates from the Federal, State, and Local Government. As long as the employer provides the weekly payroll, the numbers should be consistent.

If mistakes are made on payroll, most can easily be rectified without having to consult with attorneys, the Internal Revenue Service, and the Department of Labor. When I was taxed as a New York City resident when I happened to live in Long Island, the extra tax paid was eventually refunded when I filed a New York State tax return.

Retirement plans are highly structured tax exempt entities. They must continuously abide by the Internal Revenue Code, ERISA, Department of Treasury regulations, Department of Labor regulations, and the terms of its plan document. Errors in retirement plans can happen during contribution deposits, trade processing, determination of eligibility and vesting, discrimination testing, and the preparation of Form 5500. Retirement plans, especially 401(k) plans have so many moving parts, that an error that requires correction and reporting to the proper governmental authority can occur on a daily basis. Some errors may result in plan disqualification where prior employer deductions for plan contributions are disallowed and plan participants must immediately report their retirement plan contributions as income. This is why plan sponsors should carefully select who their third party administrator (TPA) will be.

Except for the withholding of salary deferrals, 401(k) plan administration has nothing to do with payroll. 401(k) plan administration is a highly specialized field, dependent on getting correct data from the Plan sponsor and making the correct calculations on the administrator side. Bad data will always get a bad testing result. So a large portion of what a 401(k) administrator might have to do is to check whether the data being provided by the client is error free.

Too often, I find that payroll providers who act as TPAs run retirement plans the way they run payroll. I have seen too many instances where the client provides completely wrong key and highly compensated employee information and the payroll provider TPA will run the tests with the wrong data. I remember one case when an employer did not know the definition of key employee and checked off everyone as a key employee because they were “key” to the operation of the company. So the folks making $30,000 were considered key. It was no surprise that the payroll provider TPA found the Plan to be Top Heavy even though a skilled TPA would have contacted the company about the correctness of the data.

I have had a client for the last eight years because the Plan consistently failed ADP (actual deferral percentage) and ACP (actual contribution percentage) testing for salary deferrals and matching contributions. The payroll provider TPA never bothered to explain about the benefits of 401(k) safe harbor design or that if my client would make a $7,000 qualified non-elective contribution, the owner would avoid a $10,500 ADP deferral refund. Perhaps this was because the plan was small enough that the payroll provider TPA offered a “team” approach by not allotting a dedicated administrator to that Plan. Regardless, I have always find the better TPAs to go above and beyond when it comes to correcting plan design and plan data defects. They also offer a highly experienced, dedicated plan administrator to each client because the team approach allows too many balls to be dropped and the client always wants one person in charge to talk to.

I have another client who typically has a plan error every six months with their payroll provider TPA, usually dealing with eligibility. The company had changed their eligibility requirements to immediate, but the human resources director at a subsidiary still treated the eligibility requirements as three months. If the TPA is a payroll provider shouldn’t have they asked whether newly hired employees should be treated as a participants once they showed up on payroll? Payroll provider TPAs usually mention the “seamless” integration of 401(k) plan administration with payroll as a strong selling point. After discussions with many of their unhappy clients, I understand that this integration may not be as seamless as they claim. As I stated before, 401(k) plan administration has very little to do with payroll, so many errors will be able to fall through the seams.

One major component of setting up a retirement plan is to maximize retirement plan savings for the plan participants. This can be done through a proper choice of among many different plan types and plan designs. The highly regarded TPAs (along with an ERISA attorney) are the firms that can take plan participant data and determine whether a 401(k) plan with a pro rata employer contribution is the right fit or whether the employer can augment retirement savings with a safe harbor or new comparability plan design, or whether the use a of a defined benefit plan like a cash balance plan should be added as well. Payroll providers tend to only administer 401(k) plans, so they will not likely discuss the merits of new comparability, floor-offset arrangements, or cash balance plans. They also tend to only offer cookie cutter 401(k) plan design through the use of prototype plan documents that may not fit all the needs of the 401(k) sponsor if they have a provision that may be outside the box that the prototype has set. A good TPA will be able to service the plan sponsor in all their retirement plan needs. A payroll provider TPA will only be able to service the plan sponsor in all their retirement plan needs, as long as all those needs can be met in a cookie cutter 401(k).

Another problem I have with the payroll provider TPA is the fact that they play a little too close to the role of a financial advisor/co-fiduciary. Many plans of these payroll provider TPAs do not have an advisor or broker to give them a level of protection for a participated directed ERISA 404(c) 401(k) plan. So while these payroll provider TPAs offer financial experts who select their menu of mutual funds and meet their clients, they do not offer any financial advice nor do they offer any co-fiduciary role.

I had a client with one of these payroll providers with $10 million in assets. While this Plan was large enough to have its own dedicated plan administrator/contact person, they had no financial advisor. I was at a meeting with the client, their payroll provider TPA administrator, and one of the TPA’s financial “advisor.” This advisor suggested that the Plan needed to add a small cap fund to the lineup, but he then insisted that he was not offering any advice; it was just a suggestion because he could not legally give advice. I jokingly called it a wink and a promise because while the advisor was offering a suggestion, the client could not legally rely on this suggestion.

In 2010, I cannot fathom how any TPA could offer financial suggestions from one of their advisors, knowing that these suggestions cannot be legally relied on and allowing their clients to function without the use of broker or registered investment advisor. No participant directed 401(k) plan should ever operate without the use of a broker or financial advisor and no TPA should ever take the any role where any client may think their winks on selection of mutual funds is financial advice.

Having your 401(k) plan administered by a payroll provider is like having a proctological exam performed by a pediatrician. Like a pediatrician in the area of proctology, payroll providers have a limited background and capability in administering retirement plans. Like hiring a proctologist to examine that area of trouble, it’s important to hire retirement plan experts as your TPA and ERISA attorney.

Payroll providers provide a necessary function at an affordable price. I have yet to be swayed that they can do the same job as a 401(k) TPA. While they may be the largest 401(k) TPAs in terms of number of 401(k) plans serviced, this has less to do with their skill at administration and more with their standing as payroll providers. As we also know in business, bigger is not better.

The Rosenbaum Law Firm P.C.
734 Franklin Avenue, Suite 302
Garden City, New York 11530
(516) 594-1557

* Used with the permission of Ary Rosenbaum

Legal Disclaimer: This article is intended for informational purposes only and by no means should replace or substitute other legal documents (governmental or non-governmental) reflecting similar content or advice. If you have any questions concerning your situation or the information provided, please consult with an attorney, CPA or HR Professional.