The responsibility for the disclosure of 401(k) fees, expenses and revenue sharing is shifting. In the past, plan fiduciaries, such as committee members, have had the responsibility to investigate and learn about expenses and revenue sharing—and then to evaluate the reasonableness of those amounts. However, many plan sponsors have lacked the knowledge and resources to do the job properly. Unless those companies worked with experienced 401(k) advisers, they were unable to fulfill their legal duties.
However, part of that responsibility is shifting. New bills have been introduced in Congress and new regulations have been proposed by the DOL to transfer the responsibility of employers to investigate revenue sharing to a responsibility on plan providers to disclose.
Many plan sponsors misinterpret these changes as creating new requirements. That is not the case. Fiduciaries have always had the responsibility to know about those payments. The only thing that has changed is that the burden of the fiduciaries has been partially relieved by an offsetting duty on providers to disclose.
However, once the new disclosure rules are in place, duty for fiduciaries to evaluate the information will be more obvious. In addition, fiduciaries have the duty to understand and consider any conflicts of interest, including those presented by external revenue sharing (e.g., from unrelated mutual funds) or internal payments or credits (e.g., related or “proprietary,” funds). For example, a bundled provider may make more money if affiliated mutual funds are used. That would be particularly true if the affiliated fund is a target maturity or lifestyle fund, since automatic enrollment defaults and investment education are driving more and more money to those options. Fiduciaries should evaluate the flow of that money and determine whether the total compensation to the provider and its affiliates is reasonable and whether the participants are protected against potential conflicts of interest.
Disclaimer Required by IRS Rules of Practice:
Any discussion of tax matters contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding any penalties that may be imposed under Federal tax laws.