As you’ve perused coverage of the new requirements placed on 403(b) plans, you may have experienced mixed feelings. Even though the requirements to maintain a written plan document and to file a Form 5500 are no more burdensome than those placed on sponsors of other qualified plans, 403(b) plan sponsors are starting from a deficit position—in order to report beginning of year balances, they have had to supply records where none previously existed. Some degree of sympathy is warranted; let’s all take a moment to reflect on their burden.
But as you reflect, consider the burden you’re facing. Robert Higgins, senior consultant at Benefit Plans Plus (www.bpp401k.com), says changes have come on the rest of us, too. The trend toward transparency has sponsors of large qualified retirement plans scrambling. “The 5500 Schedule C for larger plans has been drastically altered,” says Higgins. “There are also some new reporting responsibilities pertaining to provider fees. The U.S. Department of Labor (DOL) is going to be all over it; that’s one of their primary initiatives.”
The Schedule C changes pertain to the 2009 Form 5500 filing, due for calendar year plans on July 31, 2010 (though, in many cases, likely extended to October 15, 2010). Beginning with this filing, plans must disclose all fees, including indirect ones, paid by the plan. “This primarily affects larger plans, because Schedule C is only for vendors that are paid $5,000 or more.”
Indirect Fees May Be Shock
So what is an indirect fee? Higgins provides an example. “Say a company sends people to a conference put on by a vendor. The vendor is supposed to allocate those costs to all of its clients’ customers.” The cost is reflected in the fees each client is paying to the vendor and will be required to be reported on the Schedule C.
“Having done fee analyses for clients, they are always alarmed, angry, and want to fire their provider when they find out how much they’re really paying,” says Higgens.
The fees are often so well-hidden that when they are unearthed, it is a total surprise to the plan sponsor, Higgins says. “They thought they weren’t paying anything. So with the new Schedule C, these fees will be disclosed, and plan sponsors will find out what they’ve actually been paying. This is a major shift.”
Sometimes the fees have been paid for so long nobody even remembers how they started. “There are a number of plan advisors who are being compensated because they knew the guy who started the plan 20 years ago; his name is still on it, but the commissions funnel through.
Often the fees and commissions have never really been disclosed to the plan sponsor. Or you even have people who have been receiving commissions for years, maybe 50 or 75 basis points, and they don’t even do employee meetings or anything else.”
New Revelations for Participants, Agencies
As shocked as some plan sponsors will be when these fees are revealed, they are not the only group expected to feel that way. Auditors will be looking closely at the fees, and so will the government.
“Both DOL and the IRS are looking very closely at fees,” Higgins continues. “Phyllis Borzi, who heads up the Employee Benefit Security Administration, is very hot on fee disclosure. They say they’re going to come out with new, more stringent rules.
The new administration in the White House has very clearly indicated that they’re going to be much stricter in their enforcement of these things and require much broader disclosure to participants.”
Disclosure of indirect fees could result in an upheaval in the vendor market, Higgins says, causing plan sponsors to look elsewhere for their services. An even greater potential risk is how plan participants will react.
“The hotter topic, politically, is the fee disclosure to participants,” he says. Participants who believe their plan fiduciaries are not acting prudently with regard to fees have a basis to sue.
Further increasing the transparency of fees paid by the plan is the automation being used in making 5500 filings public. “With the EFAST 2 program, once the system accepts the filing, it is public record. It used to take a couple of years for it to be accessible.
“But now, if you know a corporate name or a plan name, you can take a look at the 5500. Anybody can do it: participants, the media, auditors, or the government. The 2009 filings will be out there almost instantly, including the attachments—the financial schedules and the audit.”
Not only will participants be interested in this information, so will other vendors, Higgins says. “Plan advisors and vendors need to understand that if they’re being paid more than their client thinks they’re worth, they’re at risk of losing the client.”
Small Plans Face Changes, Too
And don’t think that you’re going to skate if your plan is small. “You won’t have to file a Schedule C if yours is a small plan. But even for small employers, fees and commissions now have to be reported on the financials. There is a new form called the 5500 SF, which is for plans under 100 participants, and it has a financial schedule that includes a separate line for fees and commissions paid.”
Higgins also points to the recent 401(k) plan questionnaire. While it was sent to only 1,200 plans initially, he believes it is only the first step toward greater scrutiny of all plans.
“The questionnaire was exhaustive; it’s lengthy and it really digs down,” he says, but it’s a sample national initiative. If it works, they may broaden it. It’s likely there will be some revenue pick-up from it.
“So the fear is that it will be effective, and they’re going to widen it, maybe starting with large plans and working their way out to the smaller plans. They are looking for problems, and if history is any indication, they will find them.”
What to Do Now: Fiduciary Audit
How can you get ahead of the anticipated increased scrutiny of your plan? We hope you’ve already started. But if it took these reminders to get you started, we suggest you begin with a thorough fiduciary audit.
Higgins suggests you find a firm that can conduct an audit for a reasonable cost, and even better, that has always been transparent in their fee reporting.
BPP calls theirs a Fiduciary Health Check. “If you have an audit conducted by your CPA firm, that’s great. But it is only looking at dollars. When we do an audit, we’re looking at qualitative things [like] how you’re complying with the law.
“Our questionnaires are similar to the IRS’s; in fact, I updated ours using the questionnaire as a template to make sure we covered everything. Before, there wasn’t really a standard out there, but now, with this questionnaire, there is.
“We all know now what they’re looking for. By using the questionnaire as a guide, we can offer the assurance that the things we’re looking for are the same as they are looking for.”
The Bottom Line
Transparency is coming. “It will happen with Schedule C and through disclosure to plan sponsors. It will certainly be a hot issue with plan participants. And the fact that it will be instantly in the public record means it will be in front of people quickly.
Plan advisors need to make sure their houses are in order; the day of reckoning is coming,” Higgins concludes.