70 West Madison St.
Chicago, Illinois 60602
Retirement Plan Fee Disclosure:
Avoiding the Fiduciary Trap
Retirement plan fee disclosures are due from covered service providers by July 1, 2012, which is just a few days away. Third party administrators (TPAs), record keepers, investment advisors, fund custodians, actuaries, accountants, lawyers and other service providers who are paid from plan assets or participant investment accounts must formally disclose all plan services rendered and corresponding fees and expenses. The disclosures must be directed to employers sponsoring separate account plans, plan administrators, investment committees, trustees or others responsible for operating those types of plans. In-house legal, HR and benefits staff may be called on to assist these plan fiduciaries (click here for a summary of the provider fee disclosure rules).
The purpose of these new disclosures is to provide responsible plan fiduciaries with the fee information necessary to determine that any fees and expenses paid from plan assets or participant investment accounts (including indirect compensation such as revenue sharing) are reasonable in amount. The fiduciary's evaluation process includes the following steps:
(1) Assure Proper Disclosure. Fee disclosures received from plan service providers must be examined to see that they comply with the applicable Department of Labor regulations. If the disclosures are deficient, the responsible plan fiduciary must give notice to the service provider. If the deficiencies are not corrected, the fiduciary is required to take appropriate steps including terminating the service provider contract if corrective action is not taken by the service provider in a timely manner.
(2) Evaluate Service Provider Fees. The reasonableness of the amount of provider fees must be evaluated by responsible plan fiduciaries. This process can be done in-house if the requisite expertise and resources are available, or it can be accomplished with the assistance of an outside advisor or consultant. But regardless of how the evaluation is performed, plan fiduciaries remain personally responsible for the outcome of that evaluation (more on that below).
(3) Document the Deliberative Process. Both the process and conclusions of the fee evaluation study should be fully documented. This is a fiduciary's best defense to any claim that the fiduciary has failed to fully discharge these duties. Plan fiduciaries are required to make this determination for the exclusive benefit of plan participants and beneficiaries, not the employer. As stated in the recent decision of a federal trial court in Tussey v. ABB Inc., plan fiduciaries must go through a "deliberative process" in evaluating plan investments and associated fees, and plan fiduciaries cannot arbitrarily select high cost services and investment funds, or do so in order to offset the employer's out-of-pocket plan expenses. The fiduciaries in Tussey, including the sponsoring employer and the members of its pension review committee, failed to follow these guidelines and the court held them liable to reimburse plan participants for over $35 million in excessive fees charged to their accounts.
(4) Engage Advisors. Get any help necessary to implement the above process now. The plan's TPA or investment advisor may, or may not, be able to assist with this process by providing fee and performance "benchmark" data or other information necessary to perform a thorough fee evaluation. Also bear in mind that the employer's legal counsel may not be able to provide confidential advice to plan fiduciaries because the lawyer represents the employer, not the plan fiduciaries. Fiduciaries should consider retaining advisors through independent legal counsel so that sensitive information is protected from disclosure by applicable attorney-client privileges.
(5) Take the Next Step. Work with plan service providers to determine how the participant-level fee disclosures due by the end of August for calendar year plans will be prepared and distributed (click here for a summary of the participant-level fee disclosures). Also bear in mind that plan fiduciaries have a continuing duty to monitor the plan's investment funds to assure compliance with the fee disclosure rules on an on-going basis.
Recommendations: Sponsoring employers, plan administrators, and any staff that assists them need to respond proactively to service provider fee disclosures. Complete disclosures from all covered service providers should be received by July 1, 2012. These disclosures must be examined for compliance and the indicated fees must be evaluated for reasonableness. The fiduciaries' "deliberative process" should be documented to memorialize compliance with the fee disclosure rules and to protect against civil liability of the type imposed in decisions like Tussey v. ABB Inc. All appropriate advisors, consultants and independent legal counsel should be on board as quickly as possible to assist with this process.
Golan Christie Taglia LLP
70 West Madison St.
Chicago, Illinois 60602