Don't Let the Dust Collect on Your Retirement Plan Fee Disclosure Documents
Tom Breitenbach
Several of our retirement plan clients lately have been the lucky winners of the “audit lottery” – seemingly standard requests by the Department of Labor for additional information and documents in preparation for an on-site audit. It now appears routine for the DOL to request a copy of the fee disclosure documents provided to the plan’s fiduciary from its service providers as required by ERISA Section 408(b)(2). This appears to be a reasonable request since the 408(b)(2) notice obligations have been in place now for a couple years. However, recent DOL audit letters have included requests for “documents relating to the reasonableness of the service providers’ total direct or indirect compensation including the total direct or indirect compensation paid to the service providers’ affiliates and/or subcontractors.” Is this a request for more information than what is expressly required by the regulations?
This request may be comparable to a similar (and standard) request by the DOL for a copy of a plan’s Investment Policy Statement. An IPS is not expressly required by ERISA, but nevertheless is a well-advised document for an employer to maintain as evidence of the sponsoring employer maintaining and upholding certain minimum fiduciary standards over the plan’s investments. Technically, a response to the DOL that the plan does not have an IPS may not be a per se violation of ERISA (but may make it more difficult for the employer to demonstrate compliance with its fiduciary responsibilities over plan investments). But if an employer provides a similar negative response to this new DOL request for documents related to the reasonableness of fees, the employer runs the risk that not having such documents may be viewed by the DOL as violating ERISA’s prohibited transaction rules. After all, it has been a statutory requirement since 1974 that any contract between a plan and service provider must not provide for more than “reasonable compensation” to be paid for the services. Nothing new here.
The point is that a plan sponsor must do more than just dump its 408(b)(2) fee disclosures in a drawer. Dust them off, and actually use the information within the disclosures to determine whether compensation paid is reasonable. Revenue sharing payments must be considered, along with whether it is appropriate (or needed) to implement an ERISA “recapture account” or “budget account” to hold and allocate revenue sharing payments that exceed a negotiated fee. Benchmarking services, from companies independent of the service provider, may be used. Running an RFP every three to five years is sometimes recommended, but I think that may be overkill in terms of the amount of time and money needed to be spent by the plan sponsor. Nevertheless, the plan sponsor must do more than simply receive the 408(b)(2) disclosures – these documents should actually be reviewed and considered for reasonableness of fees. We may learn more of what the DOL expects plan sponsors to do with these disclosures, by way of example on audit findings. My advice is to take action before audit!
Several of our retirement plan clients lately have been the lucky winners of the “audit lottery” – seemingly standard requests by the Department of Labor for additional information and documents in preparation for an on-site audit. It now appears routine for the DOL to request a copy of the fee disclosure documents provided to the plan’s fiduciary from its service providers as required by ERISA Section 408(b)(2). This appears to be a reasonable request since the 408(b)(2) notice obligations have been in place now for a couple years. However, recent DOL audit letters have included requests for “documents relating to the reasonableness of the service providers’ total direct or indirect compensation including the total direct or indirect compensation paid to the service providers’ affiliates and/or subcontractors.” Is this a request for more information than what is expressly required by the regulations?
This request may be comparable to a similar (and standard) request by the DOL for a copy of a plan’s Investment Policy Statement. An IPS is not expressly required by ERISA, but nevertheless is a well-advised document for an employer to maintain as evidence of the sponsoring employer maintaining and upholding certain minimum fiduciary standards over the plan’s investments. Technically, a response to the DOL that the plan does not have an IPS may not be a per se violation of ERISA (but may make it more difficult for the employer to demonstrate compliance with its fiduciary responsibilities over plan investments). But if an employer provides a similar negative response to this new DOL request for documents related to the reasonableness of fees, the employer runs the risk that not having such documents may be viewed by the DOL as violating ERISA’s prohibited transaction rules. After all, it has been a statutory requirement since 1974 that any contract between a plan and service provider must not provide for more than “reasonable compensation” to be paid for the services. Nothing new here.
The point is that a plan sponsor must do more than just dump its 408(b)(2) fee disclosures in a drawer. Dust them off, and actually use the information within the disclosures to determine whether compensation paid is reasonable. Revenue sharing payments must be considered, along with whether it is appropriate (or needed) to implement an ERISA “recapture account” or “budget account” to hold and allocate revenue sharing payments that exceed a negotiated fee. Benchmarking services, from companies independent of the service provider, may be used. Running an RFP every three to five years is sometimes recommended, but I think that may be overkill in terms of the amount of time and money needed to be spent by the plan sponsor. Nevertheless, the plan sponsor must do more than simply receive the 408(b)(2) disclosures – these documents should actually be reviewed and considered for reasonableness of fees. We may learn more of what the DOL expects plan sponsors to do with these disclosures, by way of example on audit findings. My advice is to take action before audit!
