For Plan Sponsors, Help Determining Reasonable Fees is on the Way
As a 401(k) plan sponsor, you may have heard the terms “reasonable fees” or “reasonable compensation” in your conversations with your plan service providers. Perhaps those service providers have even provided some benchmarking reports to show that their fees are reasonable. But whose job is it to determine if fees and/or compensation related to an employer-sponsored retirement plan are, in fact, reasonable?
This question is now even more important in light of the impending implementation of the Department of Labor’s (DOL) new Conflict of Interest Rule and the expanded definition of who is considered a Fiduciary. This assumes, of course, that the administration of our newly elected president takes no action that would delay or alter the legislation’s present course for 2017 implementation.
The new rule will deal with employer-sponsored plans as well as Individual Retirement Accounts (IRAs), but we will just address employer-sponsored plans in this article.
The Employee Retirement Income and Security Act (ERISA) and the Internal Revenue Code (IRC) have long required that fees assessed to a qualified plan be “reasonable.” Such standard was re-emphasized with the 408(b)(2) fee disclosure regulations in 2012. In an article last September, I addressed the different types of compensation service providers receive and different ways to benchmark these fees. That article also discussed how to define “reasonable.”
Under ERISA and the IRC, the responsibility of determining fee reasonableness fell solely on the plan sponsor. The service provider was required to provide disclosures, and if they failed to provide the disclosures, they could be held liable for a “prohibited transaction.” However, they were not required to warrant that their fees were reasonable. Once given the appropriate disclosures, it was your job as the plan sponsor to decide if the fees were reasonable.
Under the new Conflict of Interest Rule, you still have a responsibility for determining if fees are reasonable, but depending on the type of advisor you work with, there would be some dual responsibility.
If you work with an advisor or broker who receives variable compensation or payments from third parties, they will be required under the new rule to avail themselves of a Best Interest Contract Exemption (BICE) to avoid a prohibited transaction. The BICE requires the advisor to warrant that their compensation is reasonable. So, your obligation does not go away, but now if your advisor is relying on a prohibited transaction exemption, that responsibility will be shared.
If your advisor’s compensation is on a pure level-fee basis (typical of fee only investment advisors who are already acting in a fiduciary capacity), they will not need to use a BICE unless a prohibited transaction arises. The conflict of interest rule was created because too many advisors were receiving variable compensation and were not acting in a fiduciary capacity. As a result of the new rule, plan sponsors and their employees will have greater protections for the retirement dollars they have worked so hard to accumulate.