Do You Sponsor a Defined Contribution Plan (I.E., 401(k))? You and Your Plan Par

Daily Herald (Arlington Heights, IL), July 11, 2011 | Go to article overview

Do You Sponsor a Defined Contribution Plan (I.E., 401(k))? You and Your Plan Par


Do you sponsor a defined contribution plan (i.e., 401(k))? You and your plan participants will soon be told in detail what this plan costs them.

The problem is, you may be held liable if these fees are "unreasonable." Not the investment company, not the insurance company, and not the investment broker: The business owner or "plan sponsor" will now be responsible under new rules scheduled to go into effect next year.

The change in law, effective Jan. 1, 2012, relates to an updating of disclosure rules under Employee Retirement Income Security Act of 1974 or "ERISA."

ERISA is the foundation of all federal law regarding pension and defined contribution plans. Providers of services and investments will be required to openly disclose the cost billed to participant accounts and plan assets. This disclosure will underscore the plan sponsor's responsibility to document that these fees are "reasonable".

Successful business owners know their businesses, but "fiduciary duties" for a 401(k) plan can be quite different. Making financial decisions for another person creates a "fiduciary responsibility" to act "prudently" and in the "exclusive interest" of those who are affected.

Selection, monitoring, and if necessary, replacing the investment options of the plan are fiduciary responsibilities that are accompanied by substantial liability. Investment consultants, record-keeping services, third-party administrators and other "service providers" often charge fees to participant accounts and plan assets.

Those who hire these service providers are therefore acting as a fiduciary. Given that service providers will now openly disclose fees, plan sponsors will have no excuse for failing to determine if the cost of services they pay for are "reasonable" under ERISA section IRC 404(a), as well as determining that the investments are suitable. …

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