New regulations have many executives wondering if their retirement plan is in compliance. Chances are you have a compliance violation. Patrick Shelton, Managing Member – Benefit Plans Plus, an affiliated company of Brown Smith Wallace, discusses retirement plan regulations and the critical importance of benchmarking.

1. INSIGHTS
ACCOUNTING
The new imperative
Benchmarking your 401(k) plan
M
any executives only think of their
401(k) when receiving a plan
financial statement. They don’t
consider plan operations, potential pitfalls or
their basic duties in operating plans. A set of
recently released regulations is systematically
forcing that mindset to change.
Plan sponsors’ and fiduciaries’ duties to
a plan and its participants were clarified by
the new regulations. Patrick M. Shelton,
GBA, managing member of Benefit Plans
Plus, LLC, says, “Legally, plan sponsors are
now required to have intimate knowledge of
and communicate specific plan information
to participants. If they fail to do so, they
could face regulatory penalties, legal action
from employees or get embroiled in classaction lawsuits.” He says most information
must be communicated at least annually to
participants, even those who have left the
company but still have plan balances.
Smart Business spoke with Shelton about
plan regulations and the critical importance
of “benchmarking.”
What is the key determination?
Under federal law, plan fiduciaries must act
‘prudently’ and ‘solely in the interest of plan
participants and beneficiaries’ to ensure a
plan pays covered service providers (CSP)
no more than ‘reasonable’ fees. Sponsors
must review and understand all plan fees
and then formally communicate them.
While costs are important, they are not the
only consideration. Lowest cost is rarely a
determination of a well-run and effective
401(k) plan.
What are the new regulations?
Regulations are under section 408(b)(2) of
the Employee Retirement Income Security
Act (ERISA) and are designed to help
plan fiduciaries ensure that plan service
PATRICK M. SHELTON, GBA
Managing member
Benefit Plans Plus, LLC
(314) 824-5252
pshelton@bpp401k.com
For more information regarding fiduciary
responsibilities, visit www.bpp401k.com/fiduciaryhealth-check.
Insights Accounting is brought to you by Brown Smith Wallace LLC
arrangements are ‘reasonable.’
The regulations impose a duty on every
plan CSP to provide information to plan
fiduciaries necessary for them to assess
the reasonableness of CSP compensation,
identify potential conflicts of interest,
and satisfy reporting and disclosure
requirements.
ERISA section 404(a)(5) regulations
require fiduciaries — of plans allowing
participant directed investments — to
provide specific information designed
to enable participants to make informed
investment decisions. General plan and
administrative and individual expense
information are required.
What is benchmarking and how can it help
determine ‘reasonableness’?
Benchmarking is a process for compiling
and comparing plan data to plans with
similar design and demographics. Data
might include plan design, including its
underlying details, eligibility requirements,
benefit or contribution formulas; assets;
direct and indirect administrative costs;
investment choices; compliance; and
performance.
Benchmarking simply assists fiduciaries in
determining a basis for reasonable fees. If
fees are higher than average for similar-sized
plans, there should be a clear explanation of
why more is being paid.
What are some best practices?
You should benchmark your plan every
three to four years, recognizing that the
costs of professional reviews vary widely
from $1,500 to $25,000. You should use
benchmarking services that provide relevant
data and rotate service providers to vary the
results and avoid biases. You should also ask
about the methodology to ensure you get
valid information. In addition, you should
maintain results in a file where all 401(k)related information is readily accessible and
periodically review the results and form an
action plan to bring your plan in line with
company philosophy and values.
Most benchmarking providers don’t adjust
their comparisons by region and often
extract unfiltered data from public sources.
Further, while more plan data is becoming
available, currently there’s not strong
benchmarking data for small plans, or those
with fewer than 100 participants.
What happens if you’re out of compliance?
Plan sponsors and fiduciaries are personally
liable for any failure to procure the required
information from CSPs. However, the
regulations contain a ‘safe harbor’ method of
complying — shifting responsibility to noncompliant CSPs and notifying authorities.
In most cases, CSPs provide disclosures on a
quarterly and annual basis that are designed
to be compliant with all of the rules. ●
© 2013 Smart Business Network Inc. Reprinted from the January 2013 issue of Smart Business St. Louis.