An article appeared yesterday on CFO.com entitled “New 401(k) Obligations Heaped on CFOs” and it carried a tagline stating “New disclosure rules abound, but pay close attention or you could be sued by plan participants.”
The article goes on to describe that, among other things, plan fiduciaries have a duty to “pay only reasonable plan expenses.” While this is certainly correct, it is not a new requirement.
For many years, the law has imposed a duty on plan fiduciaries to ensure that any fees paid by the plan are reasonable in light of the services provided. Just as this rule is not new, the specter of participant-driven litigation is not new either. There have been plenty of excessive fee cases in the past few years to prove it. However, in addition to the litigation risk associated with unreasonable fees, they can also result in Prohibited Transactions subject to DOL/IRS sanctions.
The challenge has been that while fiduciaries have been required to know and understand the fees (both pre-requisites for determining reasonableness), service-providers have not been required to provide that information. As a result, even the most knowledgeable and diligent fiduciaries could face significant roadblocks to satisfying their obligations. The Department of Labor’s new fee disclosure regulations change that. Originically slated to take effect this summer, the DOL recently annouced the postponement of the effective date until January 1, 2012.
The regulations are far too detailed to cover here, but the gist is that in order for fees to be considered reasonable, the service-provider who will receive those fees from the plan must disclose them to fiduciaries in advance. Obviously, the amount of the fees must be in line based on the services provided, but fees that are otherwise reasonable in amount are deemed unreasonable in the absence of proper disclosure. A plan fiduciary that allows a plan to pay fees in the absence of the requisite disclosure commits a Prohibited Transaction.
While the new fee disclosure regulations are certainly drawing much attention, it is important for fiduciaries to understand that the reaonsableness requirement is not new. If there is concern that a plan has paid or is paying excessive fees, don't wait until 2012 to start asking questions.