New 401(k) fee and reporting disclosures have taken effect

Entrepreneurs of Boulder County there are new disclosure rules for retirement plans that make your job tougher. The new rules are in response to lawsuits filed by employees and excessive fees charged by retirement plan service providers, the Department of Labor (DOL) issued new disclosure rules and regulations for 401(k)’s, pension and profit-sharing plans and many 403(b) plans. Many plan participants have seen shrinkage in their retirement plan values, in part due to market volatility and in part due to excessive fees charged by service providers. Over time, excessive fees can have a substantial negative compounding impact on investment results. The resulting regulations to correct these issues, are a three part fee-disclosure regulation set by the DOL.

The first part of the regulations essentially took place in 2009 and primarily focused on government reports, using Schedule C of each retirement plan’s Form 5500 annual report.

The second part of these regulations, effective July 1, 2012, is known as the 408(b)2 regulations and pertains to the service provider fee disclosures. The new regulations apply to all new and existing service provider arrangements, and require the service providers to disclose all compensation, fees, and a detailed description of all services to the plan. The disclosures must also reveal revenue sharing agreements to the provider’s affiliates or subcontractors. This information must be disclosed to the plan fiduciary and the plan sponsor. Plan fiduciaries have always had the obligation to monitor plan expenses under ERISA but now the ultimate oversight and well-being of the plans falls to the plan’s designated fiduciary.

The third part of the DOL’s regulations, known as 404(a)5, took effect on August 31, 2012. The amendments require plan fiduciaries to disclose fee information to plan participants. Most participants will get their first look at the new fee disclosure regulations when they get their third quarter 2012 401(k) statements. The goal of this regulation is greater transparency and standardization in the way fees and expenses are disclosed and reported to plan participants.   

The Advisors AccessTM 408(b)2 bulletin has laid out an action plan for fiduciaries and retirement plan sponsors which is summarized below:

  1. Identify all plan service providers and determine if they have provided the required 408(b)2 disclosures that are now required. If not, contact them in writing to request their response to this regulation.
  2. Complete a comprehensive plan benchmarking analysis to ensure that the plan fees are reasonable. The benchmarking analysis should include:
    1.  A thorough analysis of the plan including a review of all fund fees and plan level allocations
    2.  A fund overlap analysis showing the asset class coverage of all funds within the plan
    3.  Correlation of the funds with the market to ensure that participants are able to build truly diversified portfolios if the choose.
    4.  Determine the investment strategy used by the funds in the plan - determine whether they are actively or passively managed funds.
    5. Determine whether time based portfolios or risk based portfolios are used for the plan. Time based portfolios have a target retirement date and get more conservative as time gets closer to the target date of the fund. Risk based portfolios can cover the spectrum of risk from conservative to aggressive.
    6. Consider eliminating revenue sharing between plan service providers to reduce conflicts of interest.
    7. Consider engaging in professional third party plan fiduciaries. The increased complexity of managing retirement plans leads many plan fiduciaries to hire an expert team to help reduce their risk exposure and create a better investment experience for plan participants.

Setting up a 401(k) expert team is an alternative to the current bundled approach of most 401(k) providers. The expert team should include a plan advisor, an investment manager, a third party administrator, record keeper and a custodian.  

Plan fiduciaries have a new choice for plan advisors. They can choose an ERISA 3(21) plan advisor which will act as a fiduciary for the plan. The 3(21) plan advisor will help fiduciaries manage their plan responsibilities under the increasingly complex regulatory environment. In addition, the advisor can provide group and one-on-one education with the participants. Finally, the advisor should conduct review meetings with the decision makers of the plan on a semi-annual basis.

Another choice is to hire an ERISA 3(38) investment manager for the plan. The 3(38) manager will help plan fiduciaries navigate the complex process of choosing funds and reviewing fund fees. The 3(38) investment manager will greatly reduce plan fiduciaries’ liability by assuming the responsibility for choosing, reviewing and monitoring the plan’s fund lineup. Other benefits include designing professionally managed portfolios based on different risk factors and providing access to low cost institutional funds.

The next part of the expert team is a Third-Party Administrator (TPA) and Recordkeeper. The TPA will assist in optimal plan design and compliance testing, while the recordkeeper will be responsible for reporting to the plan participants. Typically, these functions are combined within one company.

The final component of the expert team is the custodian, who ensures that the assets are held independently and participant balances are computed on a daily basis.

The ever increasing set of regulations for plan fiduciaries can be overwhelming. ERISA even suggests the guidance of competent third parties in the operation of retirement plans. Implementing prudent processes for plan review and monitoring and creating an expert team is essential for all plan fiduciaries. Understanding that there are independent plan professionals to assist in this process will provide relief and peace of mind to plan fiduciaries and plan participants.

To find out more about how our 401(k) services could help your firm click here. If you would like our firm to interpret the new 401(k) disclosures or give a second opinion on your current 401(k) gives us a call or email us at


Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail


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