I recently attended a panel featuring Employee Retirement Income Security Act (ERISA) attorneys discussing new regulations to come out of the Department of Labor (DOL). Two cups of coffee and three hours later it finally began to make sense: No one really knows exactly what’s going to come out of the DOL. What we do know is that there is a litany of proposed regulations, and they have the ability to change the landscape as we know it drastically.
Here is an attempt to explain one proposed statute. That this barely scratches the surface is a colossal understatement:
Regulation regarding ‘disclosure’ is thought to have some changes in the works, most specifically fee disclosure. The issue is that Retirement Plan Sponsors often do not have a clear idea of what their company and its employees are paying in fees. Internal Expenses, 12b-1 fees and special revenue sharing arrangements make knowing exactly what the plan truly costs a daunting task. The onus here is less on the Plan Sponsor and more on the providers to disclose fees. Plan Sponsors are not off the hook but, the DOL wants to make sure the fees are being clearly represented to the Plan Sponsors.
The current regulation says the contract (for plan services) must meet these four requirements:
- is reasonable
- the services are necessary for the establishment or operation of the plan
- no more than reasonable compensation is paid for the services
- the plan must be able to terminate on reasonably short notice without penalty (ERISA statute 408(b)(2)).
One of the short falls of this regulation is the somewhat ambiguous wording. ‘Reasonable’ is used several times but there is really no indication of who determines what is reasonable? What may be reasonable to some may seem unreasonable to others. Most often, Plan sponsors think they are paying reasonable fees but, often they are not calculating all fees (internal expenses, 12b-1 and, other special revenue sharing arrangements).
New proposed regulations would require service providers to disclose in writing their fees or any conflicts of interest. If passed, the Plan Sponsor will know exactly what the plan costs, and then can determine if the fees are reasonable. This will pose significant liability to providers and the way they collect fees. It will also level the playing field for those already avoiding deceptive practices by disclosing fees upfront. Imagine a world with Complete fee disclosure. Sound familiar? How about disclosure of conflicts of interest? What if there were no conflicts of interest to begin with, only complete objectivity? These values are ones we are Moneta Group adhered to before the regulations were put in place. Because we act only in our clients’ best interests, were into disclosure before it was trendy.
Whether you are a Plan Sponsor or a participant in a company retirement plan you’re likely to see some changes going forward. The regulations are in place for the benefit and protection of the plan participants, and I personally believe these changes will usher in a new era of accountability. For answers on this or any other issue regarding Company Retirement Plan, contact your Family CFO.