Here's the Kicker

 

While the Department of Labor (DOL) regulates the employer-employee labor-relations world, it doesn't regulate plan providers.   So, if a failure to comply with 408(b)(2), which is reportable during audits, should happen, the DOL won't even look at the providers - or care - but it could result in a Plan Sponsor being forced to terminate a relationship with an existing provider.

 

This is because the Plan Sponsor's fiduciary duty requires periodic evaluation of the reasonableness of plan services and costs, and to take appropriate actions, such as changing the service arrangement and renegotiating fees.

  

Key point:  New Fee Disclosure regulations assign expanded duties to thousands of Plan Sponsors.   Because most lack the expertise to perform these duties, plan sponsors have traditionally relied on service providers as the expert resource for regulatory compliance.

  

 

 

But, plan providers cannot assume that role here, simply because they themselves have become the target of the regulation. 

 

 

 

While plan providers are the target, it's plan sponsors who are 'on the hook'.

 

The New Fee Disclosures explicitly requires Plan Sponsors to evaluate the need and cost effectiveness of current service providers.   This required evaluation excludes the use of existing service providers to evaluate their own costs.  The obvious conflict of interest is made even more egregious if the evaluator benefits from recommendations made to the Plan Sponsor.

  

 

 

It gets better:   While new regulations often include some form of amnesty or "grandfathering" in which existing practices and agreements are permitted to continue. The New Fee Disclosure regulations have no such provision. Plan Sponsors must comply and make new arrangements where necessary, regardless of how long old arrangements have been in effect. This approach causes the effect of the New Fee Disclosures to occur immediately and not spread out over several years or decades.

 

 

 

Plan Sponsors that do not have the expertise, tools or available resources to perform the required evaluation may elect to engage an independent third party evaluator.   The evaluator must have no financial interest or compensation that could be influenced by the results of the evaluation.  Existing service providers are therefore disqualified as evaluators.

 

 

Since self-evaluation by current service providers would be non-compliant, Plan Sponsors face the choice of obtaining the necessary skill and tools to perform the new duties internally - a time-consuming and potentially expensive process - or engaging an independent expert to assist.   According to DALBAR, the decision to engage an independent third party to perform the Evaluation protects the Plan Sponsor from the conflicts of interest that would be present in assistance from current providers. 

 

 

 

Additionally, Plan Sponsors avoid the risks of attempting to comply without expert guidance.

 

As I indicated, 408(b)(2) targets providers; but puts the onus on Plan Sponsors! Under the new regulations, it's the Plan Sponsors who must:  

 

• Obtain required disclosures from all Covered Service Providers;
• Use the disclosures to identify unreasonable services and costs then take action to change them;
• Report cost and service information to Participants and respond to their inquiries.

July 1st isn't far off.  Steps to take now

 

 

1. Assemble your internal team, checklists, and systems now; or hire an independent third-party expert who has no financial interest in the outcome.  Compensation can be paid either from plan assets or by the company, at the plan sponsors election.
    
2. Conduct a Fee-Expense Benchmarking analysis - Every plan should go through an annual fee and expense benchmarking process which compares what other plans are actually paying compared to yours.  Here's our 2-cents.
    
3. Fee Disclosure Evaluation Analysis - to check compliance or shortcomings vs. the new regulatory requirements. Obtaining a recognized certification of compliance and/or having a documented roadmap for corrections can provide proof of regulatory compliance. 

 

 

 

 

 

James Lorenzen, CFP, AIF

Founding Principal

THE INDEPENDENT FINANCIAL GROUP

A Registered Investment Advisor

805.265.5416