The federal Department of Labor is cracking down on 401(k) plans, and pushing for transparency, according to Investment News.

Requirements call for plan sponsors to report any indirect compensation they receive from fund companies to the federal authorities, for service providers to report to plan sponsors any indirect compensation they receive, and for plan participants to receive information about both.

Critics say such rules generate a barrage of paperwork, but deliver few benefits to participants.

“It’s going to require a lot of information to be tracked and disclosed that’s not being tracked [or] disclosed consistently,” said Ellen Goodwin, an attorney with the Groom Law Group in Washington and a DOL veteran. “There’s a real question of whether participants will be able to understand, or make better investment choices, based on this mountain of information.”

“The important thing is: The plan fiduciary has to be aware of all compensation that’s coming to their service provider as a result of services to the plan,” said a DOL official. 

The problem is that advisers to a 401(k) plan cannot accept other fees, sometimes for marketing or in commissions, that reduce returns to investors.

Those fees must be refunded. But separating them out becomes a complex process, especially in open architecture programs. 

The question is then whether to refund the fees to the cost of administering the plan to the sponsor, or only to the investors whose portfolios were affected.

If the decision is to refund participants, the challenge is then finding efficient software that makes it possible.

“Most systems weren’t built with this system in mind to track finders’ fees,” said Mark Gutrich, president and chief executive of ePlan Services, a Denver-based company that is among the few providers capable of dividing out the data.

Ed Ferrigno, vice president of the Profit Sharing/401(k) Council of America in Chicago, suggested an easier solution would be to disallow companies from levying these fees altogether.  

“The easiest way to drive it back home to the individual accounts is not to charge them in the first place,” he said.

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.

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