In this era of litigation, plan sponsors have to make sure they are doing their due diligence. Even if plan providers are giving them everything they need to inform plan participants about fees, it is still up to the plan sponsors to benchmark those fees and make sure they are balanced and in line with other company fees, says Steven Friedman, chair of Littler Mendelson's employee benefits and executive compensation group in New York.

“The interesting thing about the lawsuit activity taking place is that plans that were set up conventionally were found to be adopting processes that violated fiduciary standards. That has shocked plan sponsors into thinking about whether they need to change how they do business,” Friedman said.

Legal precedent

A decision in Tussey v. ABB Inc., which was handed down in March, slapped an equipment manufacturer with a $35 million judgment because the company and everyone involved with choosing investments for the company's 401(k) plan had breached their fiduciary duty. They “never calculated the amount of the recordkeeping fees paid to Fidelity Management Trust Company via the revenue sharing arrangements it had with ABB plan investments,” according to law firm King & Spalding.

The court also found that the ABB fiduciaries didn't investigate the market price for similar recordkeeping services and didn't benchmark the cost of recordkeeping fees prior to entering into the revenue-sharing arrangement with Fidelity, the law firm stated.

The Tussey case was the one that made most plan sponsors sit up and take notice that the way they were doing business had to change, Friedman says. In his business, Friedman sees a lot of employers who are very interested in making sure they have an investment policy statement that is not going to get them in trouble.

“They can get you in trouble if they contain the right language but your committee doesn't follow it. It also can get you in trouble if it is so weak that it doesn't say anything at all, in terms of giving the committee guidance,” he says. “Committees have to be careful what they put in policy statements.”

Friedman also found that employers are very concerned with how they conduct the investment committee meetings in which they evaluate investments.

“This recent case has made it clear that they must follow their investment policy statements and must have appropriate expertise on the committee to make [prudent judgments]. Oftentimes we don't see the right type of people on committees for that type of decision to be made. We are seeing an awful lot of folks revisiting their practices,” he says.

When it comes to plan participant fee disclosures, Friedman says that they may be a “bit unfair because plan sponsors often don't have the information at their disposal to determine whether disclosure is full and accurate. However, under ERISA, it is quite clear that it's the named fiduciary, which is always going to be the plan sponsor, who has the responsibility to make certain these compliance items are completed in the right way,” he says.

It is up to plan sponsors to determine if any changes are needed, but in most cases, they don't “have a good perch to view whether the information is complete and accurate and that's exactly what they have to do to make sure they don't get themselves in any hot water,” Friedman says.

He expects there will be more lawsuits stemming from participant-level fee disclosures than from plan disclosures that went into effect July 1 because the “relationship between employers and employees has been fraying over the last few years and it is not getting any better under current economic circumstances,” he says.

The battle begins

Fred Reish, partner and chair of the financial services ERISA team at Drinker Biddle & Reath LLP, doesn't believe that the participant disclosures will result in revolutionary changes, but he notes that there are some provisions in the regulations that will raise some eyebrows.

Most high-quality plan providers already give participants 90 to 95 percent of the information that is required under the new regulation, Reish says, so for the most part those rules already are being satisfied. Participants already are provided information about the expense ratios of their mutual fund investments, so “while some people expect that participants will demand lower cost funds, I don't think so because they have already been receiving information about expense ratios for many years.”

What is new is that participants will receive quarterly statements from their employers telling them about other charges that are directly assessed against their retirement accounts, like investment advisory fees, accountants' fees, legal and recordkeeping fees. “I suspect that those charges will attract most of the participants' attention…and, perhaps, their concerns and objections,” Reish says.

He advises plan sponsors to do the best job they can, as soon as possible, to explain to participants the types of charges they will be seeing on their quarterly statements and the reason for those charges.

“For example, the plan might hire an investment advisor to assist the plan committee in selecting the investment options for the plan. That inures to the benefit of the participants, since they should end up with higher-quality, lower-cost investments. However, if they have not been educated on the reasons for the payments to the investment advisor, they may object to seeing a payment to someone who they do not know and whose services they do not understand,” he says.

Parks believes the changes will be good, or at least will get the ball moving in a better direction, but he said he is still disappointed the regulations don't delve deeper and make the disclosures more applicable to individuals.

He admits that coming up with a system to benchmark all plan fees against each other would be difficult, particularly since every plan and every provider tracks things differently. But that said, plan sponsors need to be able to show that the fees they are paying are fair and reasonable as part of the new regulations.

Depending on how the industry reacts to the fee disclosures and if the industry is able to measure real change in the fees being charged to 401(k) plans, Parks hopes the Department of Labor will revisit participant-level disclosures and take them as far as he thought they would this time.