Recently posted in the National Law Review an article by f Much Shelist Denenberg Ament & Rubenstein P.C. Much Shelist spoke toNorman D. Schlismann (Senior Managing Director) and David H. Dermenjian (Senior Vice President) in the Retirement Plan Advisory Group about current issues facing 401(k) plan sponsors.
In today’s turbulent economy, 401(k) defined-contribution plans are under the microscope. Plan participants and government agencies are scrutinizing every element of retirement plans, paying special attention to the fiduciary responsibilities of plan sponsors and the fees being paid to their service providers. As a diversified financial services firm, Mesirow Financial provides a broad range of asset management, investment advisory, broker-dealer and consulting services to institutions and private clients worldwide. Much Shelist spoke toNorman D. Schlismann (Senior Managing Director) and David H. Dermenjian (Senior Vice President) in the Retirement Plan Advisory Group about current issues facing 401(k) plan sponsors.
Much Shelist: What have been some of the primary effects of the economic crisis on employer-sponsored retirement plans and 401(k) plans in particular?
David Dermenjian: Perhaps the greatest effect of the global economic situation is that everyone—from individual plan participants to plan sponsors, investment fund managers and regulatory officials—is looking more closely at fund performance, employee education and the administrative and other costs associated with these plans. This is quite understandable; over the past several years, virtually every retirement plan has experienced at least a temporary decline in value.
Individual plan participants, including employees and executives, tend to focus on the range of funds available in their plans, as well as fund performance and minimizing costs. Plan sponsors are typically interested in ensuring that they are fulfilling their fiduciary responsibilities and limiting potential liability. Government regulators want to protect individuals against unnecessary losses by stepping up their use of audits and investigations to uncover and correct potential irregularities in financial reporting, self-dealing or the occasional misuse of employee contributions. Ultimately, all of these steps are being taken in pursuit of the same goal: to help employees make wise decisions regarding their retirement assets and preserve value to the maximum extent possible.
Norm Schlismann: Education is the centerpiece of these efforts. By providing in-person counseling and seminars, online webinars and printed materials that clearly describe the various fund options, rules and fees, employers can help employees make more informed decisions, and plan sponsors can be sure they are meeting their fiduciary obligations.
One example of how education can help is in the area of target-date retirement funds. Typically, these funds are built around an estimated retirement year, say 2030. As the target date approaches and participants near their expected retirement, the fund will shift into a more conservative investment mode, often moving assets from stocks into bonds and money market instruments. What many people don’t realize, however, is that target-date funds may appear to be similar but are actually based on different assumptions. A “to-date” fund assumes that participants will withdraw all of their assets upon retirement, whereas a “through-date” fund assumes that smaller withdrawals will occur over time, perhaps on a monthly basis. Since through-date funds assume that assets will remain in the fund even after retirement, they may take a more risky approach to investment allocations.
MS: Fee disclosures have received significant attention of late. Briefly, what are they?
DD: The concept of fee disclosures has been floating around for a while, but the final rule—described under ERISA Section 408(b)2—will go into full effect April 2012. Under the rule, retirement plan fiduciaries must ensure that “reasonable fees” are being paid to providers for “reasonable services.” Fiduciaries must also obtain information sufficient to enable them to make informed decisions about the costs associated with these providers and must disclose this information to plan participants.
Typical information contained in a disclosure includes benchmarking data (comparing the fees associated with a particular fund or retirement plan to other, similar funds or plans) and fee structures. It’s important to note that higher fees are not necessarily unreasonable. Some providers offer a higher level of service—one-on-one employee counseling, real-time access to complete fund reports, etc.—which can justify the higher costs to participants.
NS: Clarity and transparency are the watchwords of disclosures. For this reason, disclosures should often include information beyond simple fee information. For example, disclosures should also include an assessment of the independence of—and potential conflicts between—service providers, as well as possible conflicts between service providers and fiduciaries. Revenue sharing and finders fees are typical areas of concern.
MS: To that point, what is the difference between a plan fiduciary and a service provider?
NS: Plan fiduciaries are individuals or groups of individuals who use their own judgment in administering and managing the plan or who have the power to actually control the plan’s assets. Service providers, on the other hand, execute the instructions of plan fiduciaries; they may include plan recordkeepers, administrators, custodians, advisors and other financial or investment professionals engaged to operate retirement plans or provide guidance with respect to the plans.
In some cases, a service provider may also act in the role of a fiduciary. For example, a broker-dealer, whose responsibility to the client for suitability and appropriateness of a recommendation ends the moment a sale is made, could be considered a service provider but not a fiduciary. A registered investment advisor, who may be involved in the recommendation of a particular investment option to the plan and who may continue to provide guidance over the life of an investment, is considered both a service provider and a fiduciary.
MS: Where can plan sponsors find the information they need to make proper disclosures?
DD: That’s the $64,000 question! While it is getting easier to obtain this information, plans and their cost structures have grown more complex over the years. Understanding exactly what the data is telling you, vis-à-vis your own plans, can be difficult. This is where the assistance of experienced financial professionals is critical.
In terms of accessing information, the trend today is toward a more open plan architecture, which makes it easier to find the required data. Similarly, a number of third-party providers offer benchmarking data and analytics. Other companies, such as Fi360, offer a more comprehensive range of resources, tools and training to help fiduciaries fulfill their duties.
However, as we’ve already noted, it is often in the best interests of fiduciaries to obtain the services of an experienced investment advisor and fiduciary consultant. In doing so, independence is probably the most important consideration. Consultants should also have proven tools and procedures that enable them to conduct a fiduciary audit (including a detailed analysis) and provide evidentiary documentation in the process.
MS: How do I know if I need this type of fiduciary audit?
NS: The easy answer is that all plan sponsors need information, and they need to fully understand how that information applies to their unique combination of employer-sponsored retirement plans and services. That said, a number of companies—especially small and mid-sized businesses—have let their plans go “dormant” over the years, acting as if nothing has changed. If you can’t clearly articulate your fiduciary process, then you probably don’t have one! And, you are probably at greater risk of failing a Department of Labor audit of your plan.
Plan sponsors may also be concerned about the cost of a consultant. However, the money spent on the services of an experienced consultant is often considerably less than the savings recouped once the plan sponsor has actionable information. The likelihood increases over time that your retirement plan is spending too much on administrative and management fees. We advise plan sponsors to benchmark their plans against comparable averages annually and benchmark against other providers in the market every few years.
The bottom line? Plan sponsors are in a better position to fulfill their fiduciary responsibilities, and lower costs mean that more money is preserved in participants’ accounts—which can result in improved returns over time.
For more information on this topic, contact Norm Schlismann (nds@mesirowfinancial.com) or Dave Dermenjian (dhd@mesirowfinancial.com).
This article contains material of general interest and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Under professional rules, this content may be regarded as attorney advertising.
