Publications

March 1998

The Latest on 401(k) Fees

By Sheldon M. Geller, Esq. Geller Group Ltd.

The Department of Labor has commenced an overall examination of 401(k) plan fees. The department is concerned that high returns in recent years as a result of the robust economy and booming stock market may be obscuring the fees paid for plan asset investment. Moreover, there may be confusion about investment choices. Even when employees choose their plan investments, the employers retain responsibility for selecting and monitoring the investment options from which the employees choose. Employees need to understand there is a cost associated with the services they select. It is more expensive to administer a plan with a wide range of investment options and trading compared to one that permits only quarterly investment options and limited trading. Both employees and employers should note that there may be trade-offs between services and fees.

The Pension and Welfare Benefits Administration (PWBA) will be reviewing a broad range of issues, including (i) whether a plan sponsor and participants understand the fees and expenses they are paying, (ii) what information is disclosed about fees and whether there is a need for more disclosure of fee information, and (iii) what practices plan sponsors are following to ensure that plan participants are not paying excessive fees for their investments.

The PWBA wishes to determine what, if any, additional actions are needed to ensure that employees receive value on their retirement investments. The PWBA's initiative on 401(k) fees also includes determining whether plan sponsors are meeting their fiduciary responsibility and developing a consumer publication to help employers and employees understand the costs associated with plan investments.

Bundled Services

Bundles of services typically include various administrative services (i.e., participant recordkeeping and investment education) along with the investment packages offered by a financial institution. The fees from the investment of the plan's assets are used to offset charges for the administrative services. The Department of Labor has recently been reviewing such relationships and commenting on the impact these fees have on a fiduciary's duty to prudently invest the plan's assets and to place the participant's interests first.

So long as an investment professional or a fiduciary does not exercise any authority or control to "cause" a plan to invest in a mutual fund, the fiduciary will not violate the anti-kickback prohibition under ERISA by receiving fees directly from mutual funds in connection with plan asset investments.

Disclosure Requirements

Plan administrators are only required to furnish statements of assets and liabilities and of income and expense and accompanying notes when requested to do so by a participant or beneficiary. These documents must be supplied free of charge and the summary annual report must contain a notice advising recipients of that faa. ER1SA requires that plan participants and beneficiaries receiving benefits under a qualified plan, including a 401(k) plan, be furnished annually with a document that fairly summarizes the latest annual report. This document known as a summary annual report contains the principal information set forth in the financial statements of the annual report.

The summary annual report also contains a notice advising participants and beneficiaries that, on request, they may obtain a copy of the full annual report. The full annual report sets forth, among other things, administrative expenses (i.e., salaries, fees, commissions, and insurance premiums) as well as other expenses associated with the maintenance of the plan. The annual report further describes administrative expenses as accounting fees, actuarial fees, administrator fees, investment advisory and management fees, legal fees, and trustee fees payable by the plan with plan assets. The summary annual report sets forth plan expenses in the aggregate and the amount of these expenses that are attributable to administrative expenses and the benefits paid to participants and beneficiaries.

Nevertheless, the summary annual report and the annual report are prepared at the plan level, and do not provide in detail the expenses born by each plan participant.

Participant Value and Benefits

Plans generally have a relationship with investment professionals' who, for the payment of investment fees, respond to all participant questions regarding investment of their account balances. Further, these investment professionals provide rollover and retirement kits, investment profiles on the funds offered under the plan, and provide annual prospectuses on all funds.

Further, these investment professionals conduct enrollment meetings and enrollment meetings, and provide retirement plan, asset allocation, and distribution planning services to plan participants. The investment professional should provide participants with quarterly newsletters and performance updates for the funds.

Further, an investment professional would normally conduct an annual fiduciary review of the investment of plan assets including a review of the investment policy statement, with the risk-and-reward profiles of the mutual funds as well as the qualitative aspects of the funds to determine whether and to what extent the funds should continue to be offered under the plan.

Plan Sponsor Responsibility

Plan sponsors, as fiduciaries, are required to administer plan assets in accordance with an investment policy statement and the fiduciary responsibility provisions of the Employee Retirement Income Security Act. More particularly, the plan sponsor must discharge his duties with respect to the plan solely in the interest of participants and beneficiaries. These duties must be discharged for the exclusive purpose of providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering the plan.

Employers are advised as fiduciaries to look closely at the fees associated with their retirement plans. Employers may face increased liability if they do not avoid high fees, or otherwise receive investment related services commensurate with their fee arrangement.