By Scott Cloud, CPC
In July and October of 2010, the DOL issued regulations aimed at improving the transparency of fees and expenses associated with employer-sponsored retirement plans. The regulations issued in July – under ERISA section 408(b)(2) – create rules for disclosures made to plan sponsors by service providers, and the regulations issued in October – under ERISA section 404(a)(5) – establish a series of participant disclosures that must be made in plans that allow participant direction of investment.
The new regulations, commonly referred to as the “401(k) fee disclosure” rules, are the result of discussions about 401(k) fee arrangements that formally began in Congress in 2007 after a wave of lawsuits had been filed against a number of large employers. The lawsuits alleged that the fiduciaries breached their duty by failing to ensure that plan fees being collected from employee accounts were reasonable. Indeed, excessive fees – which in the past have often been hidden from the view of plan fiduciaries and participants – can have an “erosive” effect on retirement savings: according to a study conducted by the Government Accountability Office, a 1% difference in fees could cut retirement assets by 20% over a career.
The new fee disclosure rules change the way in which information about fees and investments is provided to retirement plan sponsors/fiduciaries and participants. Following is a brief description of the notification requirements established by the new regulations:
The purpose of the participant fee disclosure rules under ERISA section 404(a)(5) is to “to ensure that all participants and beneficiaries in participant-directed individual account plans have the information they need to make informed decisions about the management of their individual accounts and the investment of their retirement savings.” Each participant must receive a disclosure on or before the first date on which he/she may direct investments in the plan and at least once a year thereafter. This initial/annual notice must include: a listing of all investment options, performance data, fund operating expenses, a description of applicable administrative and investment fees, and information on how to make investment selections. In addition, participants must be provided on a quarterly basis (generally as part of a quarterly benefit statement) with a disclosure that reports the actual dollar amount of administrative fees charged to the employee’s account, along with general information about the origin of the administrative fees.
The purpose of the service provider fee disclosure rules under ERISA section 408(b)(2) is to “assist plan fiduciaries in assessing the reasonableness of contracts or arrangements, including the reasonableness of the service providers’ compensation and potential conflicts of interest that may affect the service providers’ performance.” A ‘‘covered service provider’’ is a service provider that “enters into a contract or arrangement with the covered plan and reasonably expects to receive $1,000 or more in compensation, direct or indirect, to be received in connection with providing one or more specified services.” The service provider must provide the plan sponsor with a disclosure reasonably in advance of the date the contract is entered into, and no later than 60 days following the date on which the service provider becomes aware of a change to any of the information included in the initial disclosure. The service provider’s disclosure to the plan sponsor must include: a description of the services to be provided, a declaration that the service provider will provide services as a fiduciary or Registered Investment Advisor (if applicable), a description of all direct and indirect compensation applicable to the arrangement, and a description of the manner in which such compensation will be received (e.g., billed directly to the plan vs. collected from the plan’s investments).
The effective date of both the plan sponsor and plan participant disclosure requirements is April 1, 2012. Covered service providers will have until that date to make the required disclosures under ERISA section 408(b)(2). Due to a 60-day transition period established by ERISA Section 404(a)(5), the initial annual disclosure to be made to all plan participants will not be due until May 31, 2012 for calendar year plans (and 60 days after the plan year-end date for non-calendar year plans). The Retirement Plan Company will be reviewing existing service agreements and making the required disclosures to plan sponsors by the April 1, 2012 effective date. Our office will also be preparing the required annual and quarterly notices for distribution to plan participants by the applicable deadlines.
The Retirement Plan Company has long embraced full-fee disclosure as an essential element to our clients fulfilling their fiduciary responsibilities. While the notification requirements established by the regulations pose new challenges in educating our clients and their employees about plan fees and investment expenses, we view the new fee disclosure rules as an important step in improving the retirement security of participants in self-directed retirement plans.