United States

Uncle Sam Helps You Gain Control of Your Retirement Plan Fees

Third Quarter 2010


Do you sponsor a 401(k) plan, profit sharing plan, defined benefit plan or any other type of qualified retirement plan? If so, do you know what you’re REALLY paying to your recordkeeper, third party administrator, investment advisor and anyone else providing services to your plan?

Unfortunately, fees are often buried in the products offered by service providers so it becomes virtually impossible to figure out how much you’re actually paying. These fees may be buried in the actual returns of the investments, which means participants are paying fees that no one ever disclosed to them. There are some service providers who tell plan sponsors there are “no fees” for their services when in fact, they take their fees from plan assets.

For the past five years, the Department of Labor (DOL) has wrestled with this problem. However, on July 16, 2010, after years of proposed regulations and much debate in Congress, the DOL issued final regulations requiring service providers to disclose fees and compensation they receive from the plan – whether as direct compensation or indirect compensation. The disclosure rules are complex but generally provide that, prior to entering into a contract or arrangement to provide retirement plan services, the individual proposing to provide such services must provide, in writing, the following information:

  1. A description of the services that will be provided
  2. A statement as to whether the service include services as a fiduciary or Registered Investment Advisor (RIA)
  3. A description of where the compensation is expected to be paid from, whether it will be billed directly to the plan, charged against plan accounts or charged against plan investments

With regard to the disclosure of compensation, the amount can be expressed as a dollar amount, a formula, a percentage of plan assets, on a per capita basis, or other reasonable method. In addition, any indirect compensation received by the service provider must be disclosed to the plan sponsor. Here’s an example:

  • Plan sponsor retains the services of ABC Company to provide third party administration services. The plan sponsor selects XYZ to provide recordkeeping services and retains John Doe to provide investment services. John Doe receives compensation directly from the investments in the plan (also known as commissions) and therefore does not directly bill the plan sponsor. XYZ collects its fees by charging participants’ accounts and ABC is paid directly from the general funds of the plan sponsor.

In this example, the compensation received by John Doe and XYZ, must be disclosed before the Plan sponsor signs the contract or arrangement since both of these service providers are receiving payments that come from plan assets. However, ABC Company is receiving payment directly from the plan sponsor and therefore is not subject to the new disclosure rules.

Many vendors pay “soft” or “indirect” compensation to service providers such as recordkeepers and third party administration firms. Take the same example as above but change how ABC Company is paid. Assume ABC receives “revenue sharing” from the recordkeeper to offset the fees charged by ABC for providing administration services. In this case, the revenue sharing received by ABC company must be disclosed to the plan sponsor under the new regulations.

Why do we have these new rules? The DOL and members of Congress have been concerned for many years that plan fiduciaries (i.e., plan sponsors) have not had a handle on the true cost of administering their plan and the impact on participants’ accounts and plan assets. What has been touted as “free” never has been free, but plan fiduciaries were led to believe that as long as they weren’t actually writing a check, then the costs of administering their plan were reasonable.