401(k) Fiduciary? There’s Personal Liability If You Get It Wrong

The changes, which take effect July 1, 2012, are big. As a plan sponsor, you will receive new information about fees paid by the plan. You will also need to give participants some new information. For guidance, we turned to a recent BLR publication, the 401(k) Fee Disclosure Compliance Download Report.

Your Role As Fiduciary

It is important that you understand your role as a plan fiduciary. ERISA assigns certain duties to plan fiduciaries, and you must carry them out thoughtfully and diligently. If you don’t, your inaction may result in serious consequences, to you personally and to the plan. 

It’s also important to note that you can be a fiduciary whether or not you are named as one. If you are making decisions about the plan’s operations, you are a fiduciary and have all the associated responsibilities.

The overriding rule is that plan fiduciaries are required to act prudently, and solely in the best interests of the plan’s participants and beneficiaries. Failure to do so has serious consequences. Plan fiduciaries may be held personally liable for breaching their duties. This means that your personal assets are at risk, and you could even face jail time if you are found guilty of violating your fiduciary duty.

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Fee Disclosure Rules in Three Parts

The ultimate goal of the new rules is to help participants save more for retirement. To do that, participants need to understand the total return they can expect for each investment. Until now, that was nearly impossible because some of the fees have been hidden from view.

Part One: Disclosing Fees to the Department of Labor

The first part of the new fee disclosure rules notifies the DOL about the fees and compensation paid to the plan’s service providers. This part became effective with the 2009 plan year, when this information was first required on the Form 5500 Schedule C.

Part Two: Disclosing Fees to the Plan Sponsor

The second part of the new fee disclosure rules requires plan service providers to report to you—the plan sponsor—compensation they receive in connection with your plan. By July 1, 2012, service providers must disclose:

• A description of the services they are providing, with enough detail for you to make sure the plan is getting the right services. If you don’t get enough information, ask for more. It is your responsibility to get the information you need in order to perform your fiduciary duties, one of which is to evaluate the provider’s services and costs.
• A complete disclosure of any and all fees and compensation, if they reasonably expect to receive more than $1,000 for certain services to the plan.
• Besides determining whether the fees and compensation are reasonable, fiduciaries must also decide whether or not the payments represent a potential conflict of interest.
• A statement of whether or not the provider is serving as a plan fiduciary or as a registered investment advisor. If you believe a provider to be acting as a fiduciary, but there is no statement made about it, you should request a written statement about the status.

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Part Three: Disclosing Fees to Participants

The third part of the new fee disclosure rules is about reporting fee information to plan participants and employees. Here is where your communication takes on a new importance.

ERISA Section 404(a)(5) gives you the responsibility to help participants understand the fees and compensation associated with the plan. It requires you to disclose certain information about the plan and the plan’s investment options to participants and eligible employees. The DOL has issued sample disclosures in a format it will accept.

In tomorrow’s Advisor, FAQs around disclosures from the 401(k) Fee Disclosure Compliance Download Report, plus an introduction to the “Compensation Bible,” BLR’s exclusive Employee Compensation in [Your State].