Human Capital & Careers

New 401(k) Obligations Heaped on CFOs

New disclosure rules abound. Pay close attention, or you could be sued by plan participants.
John MartiniFebruary 23, 2011

In the second half of 2010, the Department of Labor (DoL) issued several proposed or final regulations regarding disclosures of retirement-plan fees and investment-related information that will be effective, or are expected to be, by the beginning of 2012. These rules impose new responsibilities on CFOs, either as plan fiduciaries or as representatives of plan sponsors under the Employee Retirement Income Security Act of 1974 (ERISA).

In 2012, plan fiduciaries and sponsors will receive more information regarding plan fees and plan investments. CFOs must evaluate the information to ensure that all plan fees are reasonable and there are no conflicts of interest with any plan service providers, as well as to ensure that any of the information that must be furnished to plan participants and beneficiaries (collectively hereinafter “participants”) is provided in a timely manner and in the proper format.

Under ERISA, anyone who has discretion over plan management or plan assets is considered a plan fiduciary and, as a result, has a duty to (1) act for the exclusive benefit of participants and beneficiaries; (2) pay only reasonable plan expenses; (3) carry out his duties prudently; (4) diversify plan investments (unless clearly imprudent to do so); and (5) adhere to the terms of the plan’s documents (unless inconsistent with ERISA). (Note: Those who render investment advice for a fee or other compensation are also plan fiduciaries under ERISA, but are not relevant for purposes of this article.)

Fiduciaries breaching their duties under ERISA, including failing to comply with the new disclosure rules discussed below, may be personally liable to restore any losses to the plan resulting from the breach. For example, a plan participant could bring a civil action under ERISA against the plan administrator for breach of fiduciary duty for any losses the participant incurs resulting from the plan administrator’s failure to perform his fiduciary duty to provide the required disclosures.

Service Provider Fee Disclosures. In July 2010, the DoL published interim-final regulations generally requiring retirement plan service providers to disclose the fees charged for their services to plan fiduciaries. Receiving this information will allow the fiduciaries to assess the reasonableness of fees being charged for plan services and any potential conflicts of interest that might affect the quality of those services. By examining the information provided, plan fiduciaries will ensure they are meeting their ERISA fiduciary duties by prudently monitoring plan service providers and paying only reasonable plan expenses. Compliance with these interim-final regulations is required by January 1, 2012.

Participant-Directed Plan Fees and Investment Disclosures. In October 2010, the DoL issued final regulations relating to the disclosure of certain plan fees and expenses and investment-related information to participants in participant-directed individual account plans, such as 401(k) plans. These new disclosure rules are based on the premise that plan administrators of participant-directed plans cannot meet their ERISA fiduciary duties to act prudently and solely in the interest of plan participants without taking steps to ensure that participants are given sufficient information on a regular and periodic basis about the plan and its investment options — including fee and expense information — to make informed decisions regarding the management of their plan accounts. Compliance with these final regulations is required by the first plan year beginning on or after November 1, 2011 (i.e., January 1, 2012, for calendar-year plans).

Target Fund Disclosures. Also in October 2010, the DoL issued proposed regulations requiring changes to the rules relating to qualified default investment alternatives and participant-level disclosures. These changes would require plan fiduciaries to provide more specific information regarding investments in target date funds to participants in participant-directed individual account plans. The proposed regulations would take effect 90 days after they are finalized, which could be by the beginning of 2012.

CFOs should be aware that these new disclosure rules could entail significant personal responsibility and therefore should be taken seriously.

John Martini is chairman of the Tax, Benefits, and Wealth Planning Group at law firm Reed Smith. He is involved in all aspects of the firm’s employee-benefits practice, concentrating in complex executive-compensation design, qualified plan compliance, and benefits-related securities issues. John also counsels companies on equity compensation and health and welfare.