More rules and administrative procedures for your 401(k) - There is a way out!

Aug. 1, 2012
One of the most common misconceptions plan sponsors have about participant-directed accounts is that their fiduciary liability has been eliminated.

By John K. McGill, CPA, JD, MBA, and Jason Arnold, QKA

Earlier this year the Department of Labor's Employee Benefits Security Administration (EBSA) released final rules that are intended to provide retirement plan participants with more meaningful information and the ability to make informed decisions.

The final rules under Section 404(a)(5) apply to qualified retirement plans that allow for participant direction of investments, and for many employers will increase the cost and administrative complexity of sponsoring a retirement plan. However, there is a way out for employers who want to reduce their administrative burden without increasing fiduciary liability. For these employers, a switch from participant-directed to trustee-directed investments may be the answer.

The new rules under Section 404(a)(5) affect the administrative burden for doctors in several ways. First, the plan administrator must provide each plan participant initially and annually with specific investment-related information, including the following categories:

1) General plan information - Includes information about the structure of the plan, investment instructions, and available investment options under the plan, etc.

2) Administrative information - Explanation of any fees or expenses that might be deducted from all participant accounts (recordkeeping fees, legal fees, etc.)

3) Individual expense information - Explanation of any fees or expenses that might be deducted from the account of a specific participant (distribution fees, loan fees, etc.)

Beyond the information above, participants must also receive a Statement of Actual Charges or Deductions every quarter that shows the dollar amount of any fees or expenses (administrative or individual) actually applied or deducted from their account, including a description of services for which the charge or deduction was made.

Investment-related information required under the final regulations includes the following three categories:

1) Performance data - Must include specific historical information on investment performance. The annual rate of return and the term of the investment must be included for fixed investment options. One-, five-, and 10-year returns for investment options without a fixed rate of return.

2) Benchmark information - For investment options without a fixed rate of return, the name and returns (one-, five- and 10-year periods) of broad-based market index must be provided.

3) Fee and expense information - For investment options without a fixed rate of return, annual operating expenses for each $1,000 invested must be provided both as a dollar amount and a percentage of assets. For investment options with and without a fixed rate of return, any restrictions on the participant's ability to withdraw money or applicable fees must be provided.

The investment-related information above must be provided annually to plan participants. The final rules also require this information to be provided in comparative chart format to help participants compare and contrast each investment option available in the plan. In addition to the required plan-related and investment-related information, there are additional miscellaneous disclosure requirements under the final rules that plan sponsors must meet. However, all of these new requirements and disclosures can be eliminated if plan assets are pooled and trustee-directed.

One of the most common misconceptions plan sponsors have about participant-directed accounts is that their fiduciary liability has been eliminated. The Department of Labor will give plan sponsors a pass with regard to fiduciary liability, but only if the sponsor follows their rules, giving participants true independent control in making investment decisions. The DOL rules require that plans with participant-directed investments implement an investment policy statement, review investment options with an investment advisor, and offer investment education to participants. Plan sponsors that do not follow the DOL rules can unwittingly increase their fiduciary liability with participant-directed accounts, when their intent was just the opposite.

Another common misconception of plan sponsors is that their fiduciary liability as a plan trustee makes them liable for poor investment returns in a pooled, trustee-directed account. In fact, ERISA is less concerned with the actual investment performance than it is with the fiduciary process of selecting the plan investments. Plan sponsors who are prudent and hire an investment advisor that implements an Investment Policy Statement (IPS), holds regularly scheduled meetings with the advisor, and makes investment decisions based on the IPS and advisor recommendations will likely prevail if a lawsuit is brought forth by a participant.

Employers who want to reduce the administrative burden and complexity that has been created by the final rules under Section 404(a)(5), remember - there is a way out. Trustee-directed investments offer a chance to reduce regulatory burden without increasing fiduciary liability.

Jason Arnold, QKA, provides retirement plan design and administration through PenSys, Inc., an affiliate of McGill & Hill Group, a one-stop resource for tax/business planning, practice transition, legal, retirement plan administration, CPA, and investment advisory services. John K. McGill, CPA, JD, MBA, provides tax and business planning exclusively for the dental profession and publishes the McGill Advisory newsletter through John K. McGill & Company, Inc., a member of the McGill & Hill Group, LLC. For more information visit

Sponsored Recommendations

Clinical Study: OraCare Reduced Probing Depths 4450% Better than Brushing Alone

Good oral hygiene is essential to preserving gum health. In this study the improvements seen were statistically superior at reducing pocket depth than brushing alone (control ...

Clincial Study: OraCare Proven to Improve Gingival Health by 604% in just a 6 Week Period

A new clinical study reveals how OraCare showed improvement in the whole mouth as bleeding, plaque reduction, interproximal sites, and probing depths were all evaluated. All areas...

Chlorine Dioxide Efficacy Against Pathogens and How it Compares to Chlorhexidine

Explore our library of studies to learn about the historical application of chlorine dioxide, efficacy against pathogens, how it compares to chlorhexidine and more.

Enhancing Your Practice Growth with Chairside Milling

When practice growth and predictability matter...Get more output with less input discover chairside milling.