The type of services available to employee retirement plans and the way in which service providers are compensated for such services have become increasingly complex in recent years. These changes may have improved productivity, increased accessibility through better technology, and made available a greater variety of investment vehicles; however, the result of these changes have made it difficult for plan sponsors and participants to identify and understand how much service providers are compensated. Recognizing the importance of plan fees, the Department of Labor (DOL) has focused on procedures designed to make fees more transparent and to allow plan fiduciaries to better understand, monitor and control fees.
The DOL's interim final regulations under Section 408(b)(2) of ERISA require disclosure of fees, expenses, and other plan and investment-related information to participants and beneficiaries in participant-directed defined contribution plans. The DOL believes that plan sponsors must ensure participants and beneficiaries are provided sufficient information regarding the plan and the investment options available, including related fees and expenses, so they may make informed decisions regarding the management of their plan.
The new fee disclosure requirements do not extend to plans that are ERISA exempt, such as governmental plans. Although plan sponsors make the final determination as to whether to comply with ERISA,service providers, for consistency, will often apply an ERISA rule to its whole customer base, including non-ERISA plans.
Fee Disclosure to Plan Sponsors
Under the DOL regulations service providers are required to disclose fees to plan sponsors in advance of entering, renewing or extending a service arrangement and no later than 60 days from the date the provider is informed of a change to information required in the disclosure. Service providers must provide written disclosure to plan sponsors. The disclosure must include a description of the services to be provided, a description of all direct and indirect compensation expected to be received, and a description of how compensation will be received. Plan sponsors can request additional information and the provider must disclose the information within 30 days following receipt of a written request.
Fee Disclosure to Participants
The DOL's final rule requires plan sponsors and fiduciaries to provide the following to participants and beneficiaries on or before the date they can direct their first investments and annually after that:
Participants must receive a quarterly statement indicating the dollar amount of plan related fees and expenses deducted from their account (administrative or individual) with a description of the services for which the deduction was made.
Investment-related information is another area, which must be disclosed. This includes core information regarding each investment option available under the plan, such as:
Performance data – specific information about historical investment performance.
Benchmark information for investment options that do not have a fixed rate of return.
Fee and expense information –
- Investment options with a variable rate of return must include the total annual operating expenses shown as a percentage of assets and as a dollar amount for each $1,000 invested, and any shareholder-type fees or restrictions on the participant's ability to purchase or withdraw from the investment.
- Investment options with a fixed rate of return must include any shareholder-type fees or restrictions on the participant's ability to purchase or withdraw from the investment.
Model charts with investment fund returns and fee-disclosure information. The DOL has published a model chart http://www.dol.gov/ebsa/participantfeerulemodelchart.doc.
Internet access or additional information about the investment options must be available. The website information must also be available in hard copy upon request.
A glossary of investment terms must be available to assist participants and beneficiaries in understanding the investment options. The glossary can be provided on the website.
Upon request, the plan sponsor must also provide prospectuses, financial reports, and statements of valuation and of assets held by an investment option.
The DOL rule offers plan sponsors protection from liability for the completeness and accuracy of information provided to participants if the plan sponsor reasonably and in good faith relies upon information provided by a service provider.
The new effective date for the plan sponsor disclosure rule was extended from January 1, 2012, to April 1, 2012. Initial disclosures must now be furnished to participants no later than:
60 days after the plan's anniversary date that occurs on or after November 1, 2011, or
60 days after the effective date of the plan sponsor-level fee disclosure rule (April 1, 2012)
The earliest that plan sponsors under ERISA will need to comply with the initial participant disclosure rules is May 31, 2012; however, that date can be later depending on the plan anniversary date. Plan sponsors have until August 14, 2012, to start providing quarterly statements of fee and expense deductions to participants.
A participant communication strategy related to these disclosures will be very important. Participants may be confused and overwhelmed by all the new information they will begin receiving especially if the information isn't provided with adequate context. The plan sponsor may consider a seminar and/or webcast to explain the disclosure materials on a step-by-step basis. A recording of such seminar would allow participants the luxury of reviewing this information at their own pace. Consideration should be given to the communications participants already receive and how to tie the new disclosure information into a cohesive and effective communication program.
Although plan sponsors do not fall under ERISA, following ERISA guidelines has been viewed as a best practice for public-sector retirement plans. It is important for plan sponsors and service providers to be transparent when it comes to disclosing fees and related services. Finally, it is vital that participant communications are carefully crafted to allow for a thorough understanding of plan fees and services.
Neither NAGDCA, nor its employees or agents, nor members of its Executive Board, provide tax, financial, accounting or legal advice. This memorandum should not be construed as tax, financial, accounting or legal advice; it is provided solely for informational purposes. NAGDCA members, both government and industry, are urged to consult with their own attorneys and/or tax advisors about the issues addressed herein.
Final Rule to Improve Transparency of Fees and Expenses to Workers in 401(k) - Type Retirement Plans: http://www.dol.gov/ebsa/newsroom/fsparticipantfeerule.html
Requirements for Fee Disclosure to Plan Fiduciaries and Participants - Applicability Dates: http://webapps.dol.gov/FederalRegister/HtmlDisplay.aspx?DocId=25179&AgencyId=8&DocumentType=2
Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans: http://webapps.dol.gov/FederalRegister/HtmlDisplay.aspx?DocId=24323&AgencyId=8&DocumentType=2