Bloggers and financial planning professionals are talking about the DOL’s upcoming requirement to disclose details about administrative fees for 401(k) plans. July 1 is the date that sets all of the wheels in motion regarding fee disclosures. Right now, you can plan ahead and be ready, and make any adjustments you feel are needed for your plan. The DOL has a worksheet that takes you through a series of steps to determine the fees you pay. Using this worksheet will give you clarity about your fees and ample time to prepare how to address the fees and present them to current employees and other plan participants. Here are the key dates to remember:

July 1 – Plan administrators and mutual funds must disclose details of administrative fees (direct and indirect compensation) in 401(k) plans.

August 30 – Plan administrators must furnish plan participants with a copy of the fees by this date.

November 14 – Date by which fees and expenses must appear on the quarterly statement for fees incurred from July to September, 2012.

With the information you uncover about your fees, you may want to consider benchmarking your plan against other plans with similar number of participants and assets. Having benchmark information will also help your justification of fees with employees. Remember that many employees are unaware of fees and will require justification because the fees affect their ultimate savings.

Understanding and communicating plan fees is just one way to be a prudent fiduciary. Another way you can assure your plan participants of good financial management is to put your plan out to bid every two to three years. While this will require extra effort from the plan sponsor, the benefits can be worth the process to ensure reasonable fees and justify services. Some companies hire a third party consultant to handle the process, taking the burden off of the plan sponsor. However, the plan sponsor is ultimately responsible and will still need to prepare search information. Here are six steps to initiating a search:

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This year, when you make New Year’s resolutions, be sure to have one about checking on the fees you pay to administer your plan. Even a company like Walmart, with its extensive legal resources, recently agreed to pay $13.5 million dollars along with Merrill Lynch for a class action settlement. Without admitting any fiduciary wrongdoing, they agreed to eliminate funds from their plans that carried high fees. A few reminders:

1. Know what fees you pay and be prepared to justify them to your plan participants as well as the DOL.
2. Be sure that record-keeping fees are documented separately from investment management fees.
3. Diversify your plan portfolio, offering choices to plan participants.
4. Communicate all changes to your plan participants and employees – clearly and promptly to avoid any misunderstandings.

Your plan auditor is a good source of information about ways to keep your plan in top fiduciary shape. Another good resource is the AICPA’s Accounting and Auditing Resource Centers.

Once you make an amendment to your plan, how and when you communicate with plan participants is an important ERISA requirement. A case this fall, Helton v. ATT, Inc. (Sept. 16, 2011), points to four important lessons in communication:

1. Answer plan participant questions in a timely and concrete manner

Your communication with plan participants is best put in writing whenever possible. Documenting answers to questions that come from plan participants about their
specific situation keeps everyone on the same page.

2. Prepare and distribute a Summary of Material Modifications (SMM) or Summary Plan Description (SPD)

You technically have 210 days after the plan year in which the changes are adopted to communicate changes. However, you’re better off preparing and distributing
materials as soon as possible to make sure that those affected by the changes can act accordingly. And, the task is complete – it won’t be overlooked with the passing of time.

3. Keep records of how and to whom SMM or SPD notices were sent.

If it’s possible for plan participants to somehow miss a piece of communication about plan changes, you need documentation to prove that the proper notice was sent in the time required by ERISA. Documentation may be as simple as a mailing list of recipients.

4. Remember that all plan participants and surviving beneficiaries need a notice, not just current employees.

This communication tip may seem obvious, but unfortunately, it’s not always followed.

The scrutiny on employee benefit plan administrators is intense, and plan management will continue to be an extremely important topic as baby boomers retire. A recent case involving plan participants for Kraft Foods Global Inc. creates a mandate for plan fiduciaries:

Plan managers must address the concerns of participants promptly and document all decisions to demonstrate that the plan is operating in the best interests of the participants.

While such a message seems obvious, day-to-day operations can interfere with fulfilling this duty. In the case of Kraft Foods, one of the investment selections was a company stock fund. The fund was ‘unitized’ with plan participants purchasing a ‘unit’ of the fund instead of a share of stock. The fund included cash, which did not increase in value at the same rate as the company shares of stock.  This situation is called ‘investment drag.’ And, while it may be appealing that specific transaction fees are eliminated, there are costs for managing the fund that are taken from the fund in general, and not from individual transactions. Because the fees associated are equally split regardless of number of units traded, a transactional drag’ occurs. In essence, plan participants pay the same fee whether they make one transaction or 10.

In hindsight, plan administrators were expected to address the ‘investment drag’ and ‘transactional drag.’ Because changes to the plan were discussed, but not implemented, the 7^th U.S. Circuit Court of Appeals found the administrators to be acting unreasonably in light of ERISA. Lawsuit situations will not just happen to Fortune 500 companies. All plan fiduciaries need to be vigilantly proactive.

The 2008-2009 financial crisis was a stark reminder of the mortality of our retirement plans. Clearly, investment/overall market performance and employee contribution levels are the greatest factors affecting plan value. But plan sponsors can also put options in place that affect value. From an auditor’s point of view, here are ways you can benefit your plan: Read the rest of this entry »