Are Plan Sponsors Up to the Task?
The responsibility for managing and overseeing a corporate retirement plan use to be back a backwater support function at most companies. The Department of Labor, however, has just significantly upped the ante for overseeing these plans.
Yesterday, Gretchen Morgenson reported on the new fee disclosure requirements pertaining to $401(k) plans, The Curtain Opens on 401(k) Fees. As the open curtain metaphor suggests, transparency will be important. However, the new rules can’t simply be fulfilled through transparency. It’s going to take more… a lot more.
Morgenson explains that the new rules will require plan sponsors to calculate and disclose expense ratios for each of the investment options offered to the plan participants. With access to greater information, it is assumed that plan participants will be able to make more informed decisions with respect to their investment selections. For everyone knows, that higher expenses eat into investment returns.
Just as plan sponsors are being required to assume additional responsibilities, however, Morgenson also reports that many managers of corporate plans are shockingly ignorant about the nuts and bolts of the operation of their retirement plans; specifically, on the expense structure of the plans. I have previously commented on then dangers of executive ignorance with respect to retirement plans. Fees & Expenses: A Perfect Storm.
The importance of these new regulations, however, is not simply that they demand greater transparency. The significant challenge lurking under the surface for corporate managers or retirement plans is that they will now be fiduciaries with respect to the fees and expenses paid by the plans.
That is, it is not enough that they properly disclose all the various fees and expenses paid by the plan. In addition, they will also have to sign off on the reasonableness of these fees and expenses.
Disclosure is a somewhat passive activity. If it were merely a matter of disclosure, then plan sponsors would simply hire consultants to calculate the expense ratios and then pass those ratios along to the participants.
As fiduciaries, however, the plan sponsors must make the affirmative decision that the fees and expenses are reasonable. This requires that they understand the economics and the entire expense structure of the plans, and affirm that the charged expenses are reasonable.
Approving fees and expenses will require a thorough understanding of the range of services and pricing for all aspects of maintaining and operating retirement plans. The fiduciaries must make their decisions in their capacities as prudent experts.
No doubt, plan sponsors will hire consultants to assist with these determinations. However, it is axiomatic under ERISA that plan fiduciaries cannot merely rubber stamp a recommendation made by consultants. Or, if in fact plan fiduciaries do rubber stamp consultant recommendations, they are opening themselves up to liability.
And remember, under ERISA, fiduciaries are personally liable for breaches of fiduciary liability.
Maybe it is time for companies to get out of the plan management business. The best course of action would be to delegate the responsibility for management and oversight of plans to proven fiduciary experts. Independent professionals who are experts in the business of maintaining and operating plans.