Category: Plan Sponsors
As I review investment policy statements for participant-directed plans, I see a number of common deficiencies. This email is about one of those—the selection and monitoring of target date funds (“TDFs”).
In my experience, most IPS’ say little or nothing about the criteria to be applied to TDFs. For example, an IPS might be completely silent on the issue or may simply say that they will be selected and monitored. But, in neither case is there a robust set of criteria. That is problematic.
One reason is that TDFs are capturing an increasingly large percentage of 401(k) assets. As more plans automatically enroll, that percentage will continue to grow. I can imagine a day, in the not-so-distant future, where over half of the assets in 401(k) plans will be in TDFs. That leads to the unfortunate conclusion that, based on the current … Read More »
The 408(b)(2) regulation requires that its service, status and compensation disclosures be made to “responsible plan fiduciaries” or “RPFs.” In the rush to make the 408(b)(2) disclosures, most recordkeepers, broker-dealers and RIAs sent their disclosure documents to their primary contact at the plan sponsor. In at least some of those cases, the primary contact was not the RPF. As a result, we added language to our clients’ disclosures to the effect that, if the recipient was not the RPF, the written disclosure should immediately be forwarded to the RPF.
The regulation defines RPF as “a fiduciary with authority to cause the covered plan to enter into, or extend or renew, the contract or arrangement.” In other words, it is the person or committee who has the power to hire and fire the particular service provider, e.g., the broker-dealer, recordkeeper or RIA.
Because … Read More »
This article was prepared by Fred Reish, Bruce Ashton and Josh Waldbeser.
Letters to 6,000 sponsors of 401(k) plans, sent out by a Yale law school professor several weeks ago, generated considerable comment and controversy. Some of the letters we reviewed suggested that the recipients were operating a “potentially high-cost plan” and that the fiduciaries may have breached their fiduciaries duties. We sent an article by email a couple of weeks ago describing these letters and giving you a link to our bulletin on the Drinker Biddle website. (A copy of that email is at http://fredreish.com/mass-mailing-to-plan-sponsors-about-excess-fund-fees/)
Since the last email, we have been able to do a more in-depth analysis of the professor’s underlying study and have concluded that it has material limitations. As a result, it does not provide a valid basis for concluding that fiduciaries have breached their duties. We have … Read More »
This article was prepared by Fred Reish, Bruce Ashton and Josh Waldbeser.
A Yale law professor is sending letters to many (perhaps thousands of) 401(k) plan sponsors telling them they may have breached their fiduciary duties because they are offering a potentially high-cost plan. For example, in one letter, he said: “Among plans of comparable size (measured by total net assets), your plan ranked worse than 78 percent of plans.” He then added, “We wanted to inform you that we are planning to publicize the results of our study in the Spring of 2014. We will make our results available to newspapers (including the New York Times and Wall Street Journal), as well as disseminate the results via Twitter with a separate hashtag for your company.”
His allegation is based on a study using data compiled by BrightScope, though we understand that BrightScope … Read More »
Many recordkeepers and bundled providers charge plans based on the number of participant accounts. Many others do not explicitly charge on a per-participant basis, but incorporate the number of accounts (and possibly the average account balances) into their pricing. It is likely that this practice will increase in the future . . . due to the new 404a-5 participant disclosures, which must be made to every eligible employee, as well as to every participant of an account balance.
With that in mind, advisers, recordkeepers and plan sponsors should consider mandatory distributions of small account balances (that is, $5,000 or less) to manage plan costs.
If a plan has the required provisions, and if the provisions have been appropriately communicated to eligible employees and beneficiaries through summary plan descriptions, plans can make distributions of account balances of $5,000 or less. If the participants … Read More »
I imagine that, by now, you have heard about the Court of Appeals decision in Tibble v. Edison. While the court decided a number of issues, the most important one is that fiduciaries have an obligation to select appropriate share classes for their plans. Closely related to that is the trial court’s admonition that fiduciaries must ask about the available share classes.
ERISA imposes both a fiduciary rule and a prohibition on spending more than reasonable amounts for operating a plan, including the investment costs. The Tibble decision was about the reasonable expense ratios for plan investments. However, rather than looking at the evaluation of mutual fund expenses in the traditional way (that is, comparing expense ratios to those of other funds), the trial court found, and the appellate court agreed, that plans must use their purchasing power to select the … Read More »
Small 401(k) accounts of former employees increase plan costs, expand administrative obligations and extend fiduciary responsibilities. Plan sponsors should consider distributing these accounts under a well-defined process and regulatory safe harbors, and advisers can provide a valuable service to their clients by educating them on the benefits of mandatory distributions and helping them set up a routine process for sweeping out small accounts. By small accounts, we mean accounts of former employees with vested balances of $5,000 or less. (In determining whether an account falls under the $5,000 limit, amounts rolled over from a prior plan or IRA and earnings on those amounts are not considered. Thus, an account may have a larger total balance and still be considered a “small account” for purposes of this concepts discussed in this White Paper.)
This White Paper discusses the reasons for – and … Read More »
The Department of Labor recently issued its agenda for regulatory guidance. Several of the projects will impact retirement plans and particularly 401(k) plans. This email focuses on a DOL project to amend the 408(b)(2) regulation to possibly require that cover service providers furnish a “guide” or similar tool, along with the disclosures. In its description of the project, the DOL states: “A guide or similar requirement may assist fiduciaries, especially fiduciaries to small and medium-sized plans, in identifying and understanding the potentially complex disclosure documents that are provided to them or if the disclosures are located in multiple documents.”
As background, the final 408(b)(2) regulation contain a sample guide. Covered service providers may want to review that part of the regulatory package in order to understand the DOL’s approach. Briefly described, though, that guide would require that, for each mandated disclosure, … Read More »
The DOL’s 404a-5 regulation places a fiduciary obligation on plan sponsors—in their roles as ERISA plan administrators—to make certain disclosures to participants. In the rush to comply with the 408(b)(2) disclosures, some broker-dealers may have overlooked the participant disclosure guidance about brokerage accounts in Field Assistance Bulletin (FAB) 2012-02.
While the legal obligation is imposed on plan sponsors, the obligation will, as a practical matter, be on broker-dealers, since plan sponsors do not have the information or capability of making these disclosures. As a result, they will turn to their broker-dealers to satisfy the compliance requirements.
My law firm recently published a bulletin about the responsibilities of plan sponsors, as the “responsible plan fiduciaries,” for reviewing the 408(b)(2) disclosures of covered service providers. A copy of the bulletin can be found at:
While many plan sponsors and almost all advisers understand that fiduciaries must evaluate the compensation of service providers to ensure that it is reasonable, there are other requirements which are less well understood.
For example, there is a requirement that plan sponsors review the disclosures as soon as reasonable to determine whether they have received disclosures from all of the covered service providers and whether the disclosures are complete (that is, whether they include all of the required information). And, it appears that at least part of the review needs to be done by the end of August.
If a plan did not receive disclosures from all … Read More »