Protecting Yourself as a Retirement Plan Sponsor By: Angela Johnson, CPA Date: 12/17/09 There has been increased scrutiny recently regarding fees charged to retirement plans.  The focus has been largely on indirect fees charged against the returns on the plan's underlying investments, most commonly found in mutual funds.  One criticism that has been raised relates to fee sharing agreements in which mutual funds share the fees received with a retirement plan's record keeper.  This money allows the record keeper to subsidize their work and charge a lower fee to the client.  Mutual funds and plan record keepers, though, have not been very forthcoming in disclosing these arrangements and indirect fees. This has led to understandable concern on the part of plan participants.  In an era of increased litigation, plan sponsors would do well to stay abreast of these issues.  Mutual funds have historically charged indirect fees, but until the recent economic downturn, it seems there was little notice taken of them.  With the significant losses in participants' retirement accounts, the environment in the industry is changing.  Plan participant lawsuits have been brought against retirement plan sponsors relating to claims that these fees are excessive or not properly disclosed.  The issue of excessive fees is tied to the selection of investment options offered in a plan, which is the responsibility of the plan sponsor.  If the plaintiffs can demonstrate the sponsor has not made reasonable efforts to select quality investment choices for their plan, then they have potentially made a successful case.  The good news for plan sponsors is that most of these lawsuits have failed because the courts felt the sponsors demonstrated that they had made reasonable efforts in selecting investment options on behalf of the plan and its participants. The Internal Revenue Service and Department of Labor, the primary regulatory groups in the industry, have also joined the movement.  New in the 2009 tax reporting, there will be significantly increased disclosure of these hidden fees on the tax form 5500.  Now all fees, both paid directly and indirectly, which are greater than $5,000, will have to be disclosed on a plan's tax return.  In the past this requirement was limited to directly paid fees only.  Some wonder if this new level of transparency will only serve to make plan sponsors more vulnerable to lawsuits and regulatory exam - making it all the more important to take precautions to protect yourself. How can you protect yourself? Documentation is the key.  Plan sponsors need to document their assessment of the investments offered in the plan and this assessment should include an evaluation of the fees charged by the funds.  Another critical mistake plan sponsors make is the lack of documented approval of direct fees charged to the plan.  In both cases the sponsor needs to demonstrate not only an awareness of the charges but their validity as well.  Just remember, as a plan sponsor, the burden of responsibility always rests in your hands, so thorough documentation is critical.