Sage Journals: Discover world-class research

Abstract

Under the Employee Retirement Income Security Act (ERISA) of 1974, employers and other plan fiduciaries have a duty to ensure that all fees paid by the plan to its service providers are reasonable. Unfortunately, many plan sponsors are not equipped with the necessary expertise and resources to determine the reasonableness of the plan’s fees. This creates a serious problem for plan fiduciaries. A mounting number of lawsuits have been filed against employers on the grounds that plan fees are excessive. Although the current legal climate surrounding the 401(k) plan industry is litigious, plan fiduciaries must follow three primary rules to ensure fees paid to service providers are reasonable. Through benchmarking fees, plan fiduciaries can meet critical requirements under ERISA; however, fiduciaries need to select a reliable benchmarking service. Financial advisors can play a pivotal role in helping the plan sponsor incorporate these services into a prudent plan review process that is intended to satisfy the requirements of ERISA.

Keywords

benchmarking prudent review process prudent expert hidden fees fiduciaries

Get full access to this article

View all access options for this article.

References

ERISA Section 406 provides, among other requirements, that a fiduciary must not cause the plan to engage in a transaction that constitutes a direct or indirect (a) sale or exchange of any property between the plan and a party in interest, (b) lending or extension of credit between the plan and a party in interest, (c) furnishing of goods or services between the plan and a party in interest or (d) transfer to, or use by, a party in interest of any plan assets. A "party in interest" is broadly defined to include the plan’s service providers, fiduciaries, the employer sponsoring the plan and their respective affiliates.

Under ERISA Section 409, a fiduciary is personally liable for plan losses resulting from a breach, such as the use of plan assets to pay unreasonable fees. ERISA Section 502(l) imposes a 20% civil penalty on amounts recovered pursuant to a settlement with the DOL. Under Internal Revenue Code Section 4975, the excise tax for prohibited transactions is assessed against the service provider receiving unreasonable compensation from the plan.

See, for example, Abbot v. Lockheed Martin Corp. (S.D. Ill. Aug. 13, 2007), Beesely v. International Paper Company (S.D. Ill. Sept. 30, 2008), George v. Kraft Goods Global, Inc. (S.D. Ill. Mar. 16, 2007), Martin v. Caterpillar, Inc. (C.D. Ill. May 15, 2007) and Spano v. The Boeing Co. (S.D. Ill. Apr. 18, 2007).

In Hecker v. Deere & Co. (7th Cir. Feb. 12, 2009), the Court of Appeals, in its grant of a motion to dismiss, held that revenue sharing was not prohibited and that ERISA did not require disclosure of such payments to participants.

The GAO is an independent, nonpartisan agency that works for Congress and is sometimes referred to as the "investigative arm of Congress."

The GAO in its December 2009 report, Additional Changes Could Improve Employee Benefit Plan Financial Reporting, recommended that the DOL further increase its Form 5500 disclosure requirements for indirect compensation and that it should coordinate these requirements with the pending ERISA 408(b)(2) regulations.

The DOL proposed new regulations under ERISA Section 408(b)(2) in 2007, which, if adopted, would require the plan’s service provider to disclose any indirect compensation and potential conflicts of interest. The DOL also proposed regulations in 2008, which, if adopted, would require plan sponsors to furnish fee information to plan participants.

See, for example, Information Letters to D. Ceresi (February 19, 1998) and to T. Konshak (December 1, 1997), the preamble to DOL proposed regulations under ERISA Section 408(b)(2) and DOL Field Assistance Bulletin 2002-2003.

See Hecker v. Deere & Co. (7th Cir. Feb. 12, 2009).

10.

For more information about ERISA fee recapture accounts, see Q&A 13 of the Supplemental FAQs About the 2009 Schedule C on the DOL’s website, http://www.dol.gov/ebsa/ faqs/faq-sch-C-supplement.html.

Selecting Benchmarking Services to Help Meet Fiduciary Requirements

Abstract

Keywords

Get full access to this article

References