Toll Free: 877.880.4477Phone: 281.880.6525

www.hrp.net

It May Be Time for Another401(k) Fee Review

www.hrp.net

The regulatory and legal pressure on employers to tightly monitor their 401(k) plan costs has always been strong, but employers may soon find a little help. At the same time, the heat is on from the federal judiciary, as the U.S. Circuit Courts of Appeals and the U.S. Supreme Court are laying down the law in this area. On a related note, small employers who are still asleep at the switch when it comes to this area of responsibility need to wake up. Here are the details.

»

www.hrp.net

A recent survey of small companies (defined as 100 or fewer employees) revealed the following, with respect to plan fees. The answers are expressed as percentages of total survey responses:

• 17 percent did not receive a fee disclosure statement from their plan provider• 13 percent received the statements but found them incomprehensible• 60 percent considered their fees less than "very reasonable"• 35 percent have not compared their 401(k)s to comparable plans in their market• 14 percent believe total plan fees in the 4-6 percent-of-assets range is fair• 13 percent believe total plan fees in the 7-10 percent range is fair• and 17 percent say they don't know what a fair fee would look like

The survey, conducted on behalf of ShareBuilder 401k, shows pockets of resistance remain among small employers towards fulfilling their fiduciary obligations. This is true even though it has been nearly two years since the Department of Labor's (DOL) 408(b)(2) fee disclosure rules took effect. Most employers should have already received two cycles of fee disclosure documents by now, alerting them to possible red flags.

www.hrp.net

To help those employers who find the statements undecipherable, the DOL has issued proposed regulations that require 401(k) vendors to furnish a roadmap to their fee disclosure statements. According to the DOL, the "locator" directory will tell you where to find:

• The description of services to be provided;• The statement concerning services to be provided as a fiduciary and/or as a

registered investment adviser;• The description of: all direct and indirect compensation, any compensation which

will be paid among related parties, compensation for termination of the contract or arrangement, as well as compensation for recordkeeping services; and

• The required investment disclosures for fiduciary services and recordkeeping and brokerage services, including annual operating expenses and ongoing expenses, or, if applicable, total annual operating expenses.

Evidence of Negligence

These regulations might not take effect until next year. Meanwhile, how you administer your 401(k) plan is critical. It must be administered consistently, in terms of how the federal courts interpret ERISA with respect to particular fee-related matters. Perhaps the most heavily watched case lately has been Tussey v. ABB Inc. Recently the U.S. Court of Appeals for the 7thCircuit, based in St. Louis, upheld a key part of a lower court's ruling against the employer, ABB.

ABB's employees complained they were being over-charged for fees by the plan's record-keeper, Fidelity Investments. Fidelity was receiving some compensation by taking a slice of the asset management fees in a revenue-sharing arrangement accepted by ABB's 401(k) plan trustees. Below you'll find the reasons the court sided with the plaintiffs on the excessive fee charge. These reasons provide a roadmap you can use to determine whether you are meeting your obligations.

www.hrp.net

www.hrp.net

ABB:

• Had never determined the record-keeping fees the plan was being charged through the revenue-sharing arrangement,

• Never tried to assess the reasonableness of those fees, and, in fact, never figured out what those fees actually amounted to,

• Failed to use its size as leverage to negotiate a more competitive fee structure -- an opportunity even for small employers, since at least they are larger than individuals paying retail prices -- and

• Failed to make a good faith effort to prevent the subsidization of non-401(k) related services charged by Fidelity, enabled by the fee-sharing arrangement. Those services included payroll processing and record-keeping for a defined benefit pension plan and its welfare plans. That failure was made more serious than it might otherwise have been because an independent consultant warned this cross-subsidization might be taking place.

The Supreme Court is Watching

In a similar case (Tibble et al v. Edison International), the U.S. Court of Appeals for the 9th Circuit in San Francisco last year ruled Edison's use of retail class mutual fund shares in its 401(k) plan represented a breach of its fiduciary duty to plan participants, since it could instead have used more economical institutional class shares. The U.S. Supreme Court has expressed an interest in that case, asking the DOL for its opinion on the matter. This suggests the high court would rule on the case if asked.

www.hrp.net

www.hrp.net

Meanwhile, the Supreme Court has already heard arguments on another 401(k) case, involving a different issue: the appropriate use of employer stock in the plan. The plaintiffs in that case (Fifth Third Bancorp v. Dudenhoeffer) had seen the value of their 401(k) balances take a hit when the employer stock plummeted. This stock represented a substantial proportion of plan assets. The issue the high court will wrestle with is whether Fifth Third Bancorp's decision to maintain the plan design was reasonable or not, in light of the inherent investment hazard caused by limited diversification.

Perhaps the main take-away from these cases isn't a definition of appropriate fees, but the critical importance of having objective processes in place to make the determination. In the ABB case, the court made its point this way: "The [fiduciary] standard is not concerned with results; rather it is a test of how the fiduciary acted viewed from the perspective of the time of the challenged decision."

14550 Torrey Chase Blvd., Ste. 360 Houston, TX 77014 USA

www.hrp.net E-mail : info@hrp.net

Toll FreePhoneFax

:::

877.880.4477281.880.6525281.866.9426