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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
Introducing a hearing on March 6, 2007 to determine whether hidden 401(k) fees are undermining the retirement security of American workers, Chairman of the House Education and Labor Committee, George Miller (D-CA), challenged the financial services industry with the threshold question of whether the numerous fees assessed 401(k) plan participants are "necessary." The hearing, the first of two planned for 2007 by the Democrat controlled Committee, was designed to highlight fees and expenses of which plan participants may not be aware, but which are significantly affecting their retirement assets, as 401(k) plans become the primary retirement vehicle for American workers.
In illustrating the problem, Miller noted that a one percentage point difference in fees can reduce retirement benefits by nearly 20 percent. The Government Accountability Office (GAO) has further reported that inadequate disclosure and reporting of fee information to plan participants has denied them the means to compare fees among plan investment options (which may lead to inappropriate investment choices). Inadequate statutory requirements have further deprived the Department of Labor of the information necessary to oversee fees and business arrangements among entities selling plans, service providers, and consultants.
Private fiduciaries have further suggested that hidden and excessive fees and arrangements between service providers, such as revenue sharing, that allow for the enrichment of non-fiduciaries (e.g., brokers and insurance agents) violate ERISA's fiduciary duty rules. By contrast, representatives of the financial services industry, while acknowledging the need for full transparency in fee disclosure, dispute that fees are excessive, and caution Congress of the need for consistent and uniform disclosure requirements that reflect an understanding of the fact that fees reflect the greater variety of investment options and services within plans, such as daily valuation.
The fee information presented at the hearing (and subsequent hearings) will help the Committee to determine if the DOL is adequately overseeing the 401(k) industry and protecting the retirement security of American workers. The Labor Department has claimed that it has sufficient resources and authority to police the industry. The hearings may, however, suggest to the Committee the need for legislation. Accordingly, the issues highlighted (and the recommendations vented) during the process may determine the shape of legislation that may require money managers to fully disclose fees and potential conflicts of interest.
Fees can significantly decrease retirement savings over the course of an employee's career. Barbara D. Bovbjerg, Director Education, Workforce, and Income Security Issues for the Government Accountability Office (GAO), for example, noted that a 45-year old employee who changes jobs with a $20,000 401(k) account balance, will realize $70,500 at retirement 20 years later, assuming an average annual net return of 6.5% (7% investment return minus 0.5% fee charge). However, if fees increase to 1.5% annually, the average net return will be reduced to 5.5%, decreasing the participant's retirement account at retirement by nearly 17 percent to $58,400.
Note the real life consequence of the fee assessments illustrated above is that employees will typically be required to work a longer period of time and/or not have sufficient income to maintain the desired lifestyle in retirement.
Investment and recordkeeping fees are the primary fees associated with 401(k) plans. Plan participants and sponsors may be aware of many of these fees. However, there are various hidden fees that are not disclosed to plan participants, although they can significantly erode retirement savings. These fees, which were detailed in the testimony of independent fiduciary, Matthew D. Hutcheson, include: undisclosed trading costs, SEC Rule 28(e) excess commissions, sub-transfer agent revenue sharing, non-fiduciary 12b-1 commissions, variable annuity wrap fees, and administrative pass-throughs.
Note a central current running through Mr. Hutcheson's testimony was the belief that the reduction of net returns through unnecessary and excessive brokerage expenses is an imprudent practice that runs counter to the fiduciary standards of ERISA. In addition, he cautions plan sponsors that, by allowing plan assets to be spent on services that may be imprudent and/or excessive, they invite suit for breach of fiduciary duty.
Robert G. Chambers, representing the American Benefits Council, stressed that fees should be evaluated in the context of the services being provided. Increased fees generally reflect increased services, such as daily account valuation, on-line distribution and loan modeling, on-line calculations for comparing deferral options, and investment advice and education services. New services and products, as well as new legal requirements and planning options (such as the Roth 401(k)) and the attendant cost of updating computer systems to assure compliance, have a cost, Chambers emphasized.
Many fees remain hidden because, while plan sponsors must provide participants with summary plan descriptions, account statements, and a summary annual report, ERISA does not require these documents to include information on the fees incurred by individual participants. In addition, the GAO notes, plan sponsors provide fee information in a piecemeal fashion or in a way that makes a comparison of fees among investment options difficult. Particularly problematic is the fact that employers, other than sponsors of ERISA §404(c) plans, are not required to provide expense ratios to participants, although such fee measures are the best way to compare fees among investment options.
The GAO also charges that the limited information plan sponsors are required to disclose prevents the DOL from exercising effective oversight over 401(k) plan fees and business arrangements involving service providers. In addition to expense ratios and other fee information, GAO notes that the DOL and plan sponsor may not have information on revenue sharing and other arrangements among service providers than may suggest or invite conflicts of interest.
The focus of the GAO recommendations is on empowering participants with fee information that will enable them to make informed comparisons and decisions among plan investment options. Specifically, the GAO has recommended that ERISA be amended to require all sponsors of participant-directed plans to disclose fee information on 401(k) investment options to participants in a way that facilitates comparison among the options. In addition, the GAO has suggested that the DOL require plan sponsors to report a summary of all fees that are paid out of plan assets or by participants. In order to allow the DOL to exercise oversight of fees and business arrangements among service providers, the GAO has also recommended that ERISA be amended to specifically require 401(k) service providers to disclose to plan sponsors the compensation that the providers receive from other providers.
Stephen Butler, President of Pension Dynamics Corporation, recommends the adoption of a national standard fee disclosure form. The form would require disclosure of the cost in dollars and compound earnings over a 10 and 20 year time period, based on the average fees charged to participants, assuming an even mix of investments across the entire spectrum of fund offerings. This information would be included on the front page of the 401(k) presentations and incorporated into the SPD.
Robert Chambers, of the American Benefits Council, advocated "universal" disclosure of meaningful information, such as fees that service providers receive from the plan or unrelated third parties. In this vein, Chambers expressed support for a 3-part DOL initiative that, over several years, is designed to enhance transparency by improving disclosure to plan fiduciaries, plan participants, and the DOL. However, Chambers cautioned that "overly complicated and burdensome" disclosure rules would "push" employers (especially small employers) and service providers away from the 401(k) plan system. Overly complicated disclosure, according to Chambers, would confuse, rather than inform participants. Finally, Chambers noted that the expense of complying with new disclosure requirements will be borne by participants.
For more information on this and related topics, consult the CCH Pension Plan Guide.
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