New 401(k) Rules Could Affect Your Practice

Written by on April 4, 2012 in Law & Finance - No comments

By Jennifer B. Daknis

2012 brings a magnitude of regulatory changes that affect all qualified retirement plans such as 401(k)s, 403(b)s, defined benefit plans and profit sharing plans. Many business owners, executives and human resources managers are unaware of these upcoming regulatory changes and how this will affect both them and their plan participants. These regulations, imposed by the Department of Labor (DOL), are designed to enhance the communication of the fees and expenses of the plan as well as conflicts of interest between the plan sponsor (the business owner or organization that establishes the retirement plan for their employees), the covered service provider (to be defined later in this article) and the plan participants (employees or beneficiaries who have an account balance in these types of plans). New fee disclosure rules require plan sponsors to have access to a complete description of the services being provided to the plan as well as information about how much their retirement plan actually costs.

To understand these regulations, we must first define who is a fiduciary and what it means to be a fiduciary. A fiduciary can be defined as a plan trustee (normally the business owner or high-level executive), an individual who exercises discretionary authority or control over plan assets, an individual who provides investment advice for compensation or an individual who is responsible for plan administration. Simply put, a fiduciary is anyone having legal or ethical responsibility for looking after someone else’s money. The DOL handbook states that “Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries.” Fiduciaries are required to operate solely in the best interest of the plan participants (versus non-fiduciaries who have divided duties of loyalty).

These DOL regulations affect both plan fiduciaries and plan participants. Let’s take a look at two of these regulations:

ERISA Section 408(b)(2): this regulation requires that all covered service providers must provide certain disclosures to plan fiduciaries. Services as a registered investment advisor, certain recordkeeping and brokerage services, accountants and attorneys that receive indirect compensation from the plan are all considered covered service providers. These covered service providers must disclose in writing to the plan fiduciary, by July 1, 2012, the description of service that they are providing, compensation (direct or indirect) they expect to receive and how that compensation will be paid to them in connection to those services. Up until ERISA Section 408(b)(2) was introduced it was difficult for plan fiduciaries to get information from service providers in order to make well informed decisions on plan contracts. Now this regulation will help plan fiduciaries make better decisions about who they will hire to help them manage and administer their plan, and to determine whether the arrangement with the service provider is reasonable.

ERISA Section 404(a)(5): this regulation requires that plan fiduciaries who offer participant-directed accounts (where the participant can choose their investment options from a pre-determined line up) provide all participants certain plan and investment-related information. This includes:

  • a listing and description of all available investment options,
  • instructions on how to select and/or change their investment options and how often those changes can be made,
  • an explanation of all administrative fees and expenses that are charged

and/or deducted from their individual accounts/balances, any individual fees incurred by the participant such as loan fees or transaction fees. In addition the plan sponsor must provide the participant performance data, benchmark data, and a glossary of terms.

These requirements are designed to help the plan participant better understand their investment options in order to make an informed decision when it comes to their retirement plan assets. Plan fiduciaries must provide this information to the participant by August 31, 2012.

The most important decision a plan fiduciary can make is to enlist the assistance of an investment representative who can help them navigate their own duties as a fiduciary, including the selection of other service providers, investment managers and custodians. These plan fiduciaries must apply prudent process to make a proper decision about many areas of their qualified plan and that involves a careful review of ERISA Section 408(b)(2) and ERISA Section 404(a)(5).

Jennifer B. Daknis is an Accredited Investment Fiduciary and assists plan sponsors with their fiduciary obligations. She is a partner with Sigmon Daknis Wealth Management. Securities offered through LPL Financial, member FINRA/SIPC. Sigmon Daknis Wealth Management serves individuals and their families as well as corporate clients. She can be reached via email at or via phone at 757.223.5902 (Newport News office) or 757.258.1063 (Williamsburg office).

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