New 401(k) fee, reporting disclosures in effect

New disclosure rules for retirement plans are complicating matters for Boulder County entrepreneurs.

The new rules, issued by the Department of Labor , involve 401(k), pension and profit-sharing plans and many 403(b) plans. They are in response to lawsuits filed by employees and excessive fees charged by retirement-plan service providers.

The first part of the regulations essentially took place in 2009 and primarily focused on government reports, using Schedule C of each retirement plan’s Form 5500 annual report.

The second part of these regulations, effective July 1, 2012, is known as the 408(b)2 regulations. They require service providers to disclose all compensation, fees and a detailed description of all services to the plan. The disclosures must also reveal revenue-sharing agreements to the provider’s affiliates or subcontractors. This information must be disclosed to the plan fiduciary and the plan sponsor. The ultimate oversight and well-being of the plan now falls to the plan’s designated fiduciary.

The third part of the Labor Department’s regulations, known as 404(a)5, took effect Aug. 31. The amendments require plan fiduciaries to disclose fee information to plan participants.

The Advisors Access 408(b)2 bulletin has laid out an action plan for fiduciaries and retirement-plan sponsors:

• Identify all plan service providers and determine if they have provided the required 408(b)2 disclosures that are now required. If not, contact them in writing to request their response to this regulation.

• Complete a comprehensive plan benchmarking analysis to ensure that the plan fees are reasonable. The benchmarking analysis should include a thorough analysis of the plan including a review of all fund fees and plan level allocations, a fund overlap analysis showing the asset class coverage of all funds within the plan, and correlation of the funds with the market to ensure that participants are able to build truly diversified portfolios if they choose.

• Determine the investment strategy used by the funds in the plan, and determine whether they are actively or passively managed funds.

• Determine whether time-based portfolios or risk-based portfolios are used for the plan.

Time-based portfolios have a target retirement date and get more conservative as time gets closer to the target date of the fund. Risk-based portfolios can cover the spectrum of risk from conservative to aggressive.

• Consider eliminating revenue sharing between plan service providers to reduce conflicts of interest.

• Consider engaging in professional third-party plan fiduciaries.

Setting up a 401(k) expert team is an alternative to the current bundled approach of most 401(k) providers. The expert team should include a plan adviser, investment manager, third-party administrator, record keeper and custodian.

Plan fiduciaries have a new choice for plan advisers. They can choose an ERISA 3(21) plan adviser who will act as a fiduciary for the plan and can provide group and one-on-one education with the participants. The adviser should conduct semiannual review meetings with the plan’s decision makers.

Another choice is to hire an ERISA 3(38) investment manager for the plan. The 3(38) manager will help the plan’s fiduciaries navigate the complex process of choosing funds and reviewing fund fees. The 3(38) investment manager reduces plan fiduciaries’ liability by assuming the responsibility for choosing, reviewing and monitoring the plan’s fund lineup. Other benefits include designing professionally managed portfolios based on different risk factors and providing access to low-cost institutional funds.

The next part of the expert team is a third-party administrator, or TPA, and record keeper. The TPA will assist in optimal plan design and compliance testing, while the record keeper will be responsible for reporting to the plan participants. Typically, these functions are combined within one company. The final component of the expert team is the custodian, who ensures that the assets are held independently and participant balances are computed on a daily basis.

The ever increasing set of regulations for plan fiduciaries can be overwhelming. The Employee Retirement Income Security Act suggests the guidance of competent third parties in the operation of retirement plans. Implementing prudent processes for plan review and monitoring and creating an expert team is essential for all plan fiduciaries.

Robert J. Pyle, CFP, CFA, is president of Boulder-based Diversified Asset Management Inc., an investment adviser registered with the state of Colorado. This column reflects the writer’s views and is not a recommendation to buy or sell any investment. It does not constitute investment advice. Contact Pyle at 303-440-2906 or


Social Network

Facebook Icon
Twitter Icon
LinkedIn Icon
©2016 BizWest The contents of this website are copyright BizWest Media, LLC. All rights reserved.
Use of any of this informatino or media on this site is strictly prohibited withotu express written consent.