In the past several months, several new disclosure rules have been put in place for business owners who have a pension and/or profit-sharing plan. The rules revolve around disclosing the actual fees and expenses that are deducted from a participant’s account. The business owner/employer, in his fiduciary role, is responsible for gathering the information and disseminating it to his employees on a quarterly basis, no later than Nov. 14.
These rules are intended to provide the participant with more information about the fees and expenses associated with his or her account. Personally, I think this is a good thing; more information is usually better in making long-term decisions. Additionally, a 1 or 2 percent difference in expenses over the working life of an employee can make a significant difference to the ending value of the account at retirement.
The rules, of course, have a lot of details about how the information is presented. The delivery of investment-related information must be in a format that enables employees to “meaningfully compare” investment options in their plan.
The plan fiduciaries, that is the employer, must use “standard methodologies” when calculating and disclosing expense and return information, thus facilitating an “apples-to-apples” comparison.
A second rule that goes into effect is a different disclosure of information that is to be made available to the plan fiduciaries. (Yes, no matter what anyone else tells you, you as the employer are a fiduciary on the plan to your employees.) This disclosure is from your service provider to the plan fiduciary regarding all their agreements and compensation.
Your duty, as the employer and fiduciary, is to determine whether the agreements and compensation of your service provider are reasonable. Although this may sound like a difficult task with very little basis for reference, the fact is, this is a very difficult task with very little basis for reference.
Most employers have no idea what this benchmarking entails and what the penalties are for failing to do this and documenting the results. They certainly don’t get much help from the person who sold them the plan.
Most people in my business are simply salesmen who don’t really know what it means to be a fiduciary, let alone agree to be a co-fiduciary in writing. Many people think that fiduciary is one of the seven words you can’t say on television.
The truth is that this is where the solution for employers can be found, i.e., with an adviser who truly specializes in these plans, who knows not only how to follow the rules but has worked directly with the regulators to solve problems and is willing to take on the responsibility of being a co-fiduciary with the employer.
The Department of Labor has hired more than 500 new enforcement agents to look at employer plans and conduct audits. Are you ready? Have you done an internal audit on your plan to prepare for the Dept. of Labor? Do you know what your fiduciary responsibility entails? Does your adviser share in the responsibility in writing? Have you created an ongoing process to stay in compliance?
Interestingly, we have already been involved with several plans that have been audited and have worked with the Dept. of Labor and the employer to satisfy requirements. It won’t be fun if you are not prepared.
All of these new rules are geared to benefit and protect your employees. I think the process is good because it continues to lay the groundwork for less dependence on Social Security and more on private funds. The bad thing is that it does put more responsibility on the employer and some employers will simply say that the plan is not worth it and not provide a plan at all.
Additionally, the penalties for not fulfilling this responsibility are severe and cannot be brushed off as something to deal with when or if it happens. Prepare for the Department of Labor requesting information and do a self-audit with a qualified professional adviser now.
Gary L. Rathbun is the president and CEO of Private Wealth Consultants, LTD. He can be reached at (419) 842-0334 or email him at garyrathbun@privatewealthconsultants.com.
