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Practice Management > Compensation and Fees

Preparing clients for DOL audits

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There’s no denying it. The chances that one (or more) of your retirement plan clients could be tapped for a Department of Labor audit are greater than ever.

That’s because the DOL is stepping up audits of plan sponsors. One focus is whether plan sponsors are fulfilling their fiduciary duties to ensure the fees they’re paying are reasonable for the services they receive. This includes a strong interest in advisor compensation and services — and whether the advisor is being paid a reasonable amount. 

The best thing you can do now is to prepare yourself — and your clients — ahead of time. This will help you spend less time alleviating plan fiduciary concerns, and allow you to spend more time working with clients to meet their goals.

This preparation can pay off even for clients who don’t get audited. Thorough disclosure of your services and fees can help you deepen your relationships with existing clients. It can also be helpful as a prospecting tool for engaging new clients, who will clearly understand your fees and service offerings.

Leave a paper trail

Employers are obligated under the 408(b)(2) regulation to evaluate the reasonableness of service provider compensation. Make it easy for your clients to do this by clearly specifying the services you bring to their plans.

Good recordkeeping of everything you do can provide a helpful backup in responding to questions that may arise about the scope of your services. Keep records of your client service work, including:

  • Investment policy adoption and updating.
  • Oversight and monitoring of designated investment alternatives.
  • Regulatory updates and developments.
  • Fiduciary training.
  • Investment or other fiduciary committee meeting support.
  • Analysis and reports on plan fees and expenses.
  • Actions taken to mitigate or reduce plan expenses.
  • Watch list recommendations.
  • Actions taken to replace or retain funds.
  • Participant enrollment meetings.  
  • Investment education or retirement readiness sessions.  

Help your plan sponsors prepare for questions

You’ll also want to prepare your clients for the kinds of questions they may get from the DOL during an audit. For instance, the DOL is likely to ask if the responsible plan fiduciary has taken the appropriate steps to:

  • Identify the plan’s covered service providers.
  • Obtain the disclosures required of those service providers under the 408(b)(2) regulation.
  • Determine the reasonableness of that compensation in light of the quality of services provided.

Your preparation should span two levels. First, with your own compensation, make sure you’ve delivered a disclosure that satisfies the requirements of the 408(b)(2) regulation. Second, you may want to help your client understand  their 408(b)(2) responsibilities involving other service providers.

Be ready to explain every aspect of your fees

How is your compensation structured? It is flat fee or asset based? There are legitimate reasons for both. That said, the asset based structure may require more explanation if the services provided don’t align with any changes in compensation level.

Regardless of fee structure, be prepared to clearly and accurately explain how and why you charge what you do for your services. Making sure your client understands will help them feel more prepared and help to boost the odds of a successful audit.

Finally, your disclosure may change as a result of an expected revised definition of fiduciary from the DOL, so continue to stay up to speed on all new legislation and regulation that could impact DOL audits. 

The introduction of 408(b)(2) rule disclosures are actually an opportunity for you to take a proactive, upfront and collaborative approach — and ensure your fees remain competitive and transparent. Being prepared also shows that you’re ahead of the game and helps you stay focused on your clients’ goals for their plans. And that helps their business — and yours — be more successful.

See also:

5 reasons to rethink the 60-40 rule

Death of a broker

Indexed funds nab two-thirds of CTFs in DC plans


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