The Rosenbaum Law Firm P.C. Blog

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I had a contractor work on my house for a couple of projects. Frank installed a new front door, installed a garage, re-did the sheet rocking of a few rooms, and installed a new kitchen. We thought he was dependable and would never believe that he would take advantage of us.

As part of a mold remediation, we had to sheetrock the den. I thought the job was about $9,000 to $10,000. Frank wanted $14,000. I thought it was high, we found another contractor who would do it for $9,000. We would never know we were paying too much unless we benchmarked Frank’s proposed fee. Who knows how much we overpaid on the other projects?

Competing plan providers hear it all the time from prospective clients all the time, how their current provider would never overcharge them. Unless a plan sponsor benchmarks the fee they are being charged (which is their fiduciary duty to do so), how will they ever know?

Benchmarking the fees you are being charged is not about the lack of trust in your providers, just exercising their fiduciary duty. It’s OK to have faith in your providers, but not blind faith.

Overpaying Frank was our mistake and we’re out money, overpaying your plan providers is a breach of fiduciary duty and possible liability from plan participants.

While some may claim that fee disclosure that will come for retirement plan sponsors on April 1, 2012 from Section 408(b)(2) regulations will be a breath of fresh air for the retirement plan industry, the cynics in me will say that it will have very little effect. The reason? It’s useless if the plan sponsor doesn’t benchmark the fees they are charged.

A plan provider can still include inflated charges like a custody fee on steroids of 20 basis points with the hope that plan sponsors will accept those fees as a grain of salt since most plan sponsors won’t exercise their fiduciary duty by benchmarking their fees.

Fee disclosures will tell plan sponsors what their fees, but it won’t tell them whether the fees are reasonable or whether they are reasonable for the services provided. Disclosure is only on piece of the puzzle, it’s up to the plan sponsor to figure out the rest of the puzzle on their own.

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All plan providers are hurrying to meet the April 1 deadline of providing fee disclosures to plan sponsors (cheap plug, I am still available to draft client service agreements to comply with 408(b)(2) for $1,000). The deadline doesn’t look like it’s going to be extended, despite many retirement plan business groups asking for an extension. The April 1 deadline may be scary for some, but there is one other deadline that scares me a lot more and no one is talking about it. It is 60 days later and the people have to provide it, don’t even know about it.

While the onus is on plan providers to make the disclosures to the plan sponsor on April 1, the onus shifts to plan sponsors for the plan participant Section 404(a)(5) disclosures by May 31. While plan providers will help plan sponsors out with the information to complete these, I’m sure that there will be some that won’t. It’s just human nature to understand that if there is a mandatory compliance, a few providers will either ignore it or claim that it doesn’t apply to them.

While plan sponsors are on the hook if they don’t get the 408(b)(2) plan disclosures, there is a way out from liability if they don’t. They don’t have the same luxury with the 404(a)(5) disclosures, it’s fully on them to get it done and make sure their plan providers are ready to help.

So while 408(b)(2) is all the rage these days, the Section 404(a)(5) regulation scares me more because while I have faith in the retirement plan industry, too many plan sponsors are like deer in the headlights and don’t have the right providers telling them of their duty by May 31.

I had an interesting discussion with a financial advisor who was inquiring about in-service distributions, when a participant can withdraw their retirement savings while still working for the employer. The financial advisor wanted a provision where a participant could move their salary deferrals from a 401(k) plan into an individual retirement account at any time. I told him the rule, that any in-service distribution of salary deferrals prior to age 59 ½ (except for a hardship) is a disqualifying plan provision.

Our conversation then segued into the new 401(k) advice regulations, where financial advisors can finally provide investment advice. He lamented that no matter what type of education and advice you give, participants still will make poor investment decisions.

While studies have shown that advice does increase the participant’s annual return by 3% annually, I see the use of an investment advice for what it really is and what is should be sold as, liability protection.

ERISA Section 404(c) will shield the plan sponsor from liability when participants exercise the control of his or her investments within a retirement plan. The regulations require the plan sponsors to provide participants with enough information so that they can be informed in the investment decision making process. So I see the use of investment advice as the ability for a plan sponsor to minimize liability by getting better Section 404(c) protection.

The use of investment advice reminds me of some old political arguments. Investment advice will create an equality of opportunity for all plan participants to use investment advice to better manage their plan investments. However, it can never create equality of result because people will be people and some participants will still make poor investment decisions or not participate in the 401(k) salary deferrals portion.

You can lead a horse to water, but you can’t make him drink. You can lead a participant to sound financial advice, but you can’t make him use it.

The folks at rj20.com and I are doing a webinar on thew Department of Labor investment advice regulations for plan participants on Monday, February 6, 2012 at 2 PM EST. If you are a financial advisor, you may learn a thing or two and it’s free. Sign up here.

My newest JDSupra.com article can be found here.