DOL Extends Deadlines for Service Provider and Participant-Level Fee Disclosures by Additional 3 Months
The U.S. Department of Labor's (DOL) Employee Benefits Security Administration (EBSA) published its long-awaited final rule, "Reasonable Contract or Arrangement Under Section 408(b)(2) – Fee Disclosure," in the Federal Register on Feb, 3, 2012. The final rule requires retirement plan service providers to disclose to plan sponsors the administrative and investment costs associated with their plans. It extends the effective date to July 1, 2012, for new and existing contracts or arrangements between service providers and plans covered under the Employee Retirement Income Security Act (ERISA).
Another set of required fee disclosures, from plan sponsors to 401(k) plan participants (participant-level fee disclosures), is set to take effect 60 days after the service provider fee disclosure deadline. Due to the extension of the effective date of the final rule, plan administrators for calendar year plans now must make the initial annual disclosure of "plan-level" and "investment-level" information (including associated fees and expenses) to participants no later than Aug. 30, 2012, and the first quarterly statement (for fees incurred July through September) must be furnished no later than Nov. 14, 2012.
To learn more, see the SHRM Online article "DOL Final Rule Extends Deadlines for Service Provider and Participant-Level Fee Disclosures by 3 Months."
Since 2007, the U.S. Department of Labor (DOL) has passed regulations regarding the disclosure of retirement plan fees. These regulations are a part of a broad-based effort by the DOL to enhance the transparency around the many types of plan fees and to foster better understanding by plan sponsors and participants about the fee components.
Three regulations have been issued to achieve this goal. The first obliges plan sponsors to include a Schedule C with their annual Form 5500 filing. Schedule C requires the plan sponsor to list the name and compensation amount of service providers that received $5,000 or more in compensation during the plan year directly or indirectly from plan assets. Released by the DOL in 2007, this regulation became effective for 2009 plan year-end filings.
A second regulation, which covers fee disclosure to participants, requires extensive details about all investment fees, plan fees and other fee information so that participants can make informed investment decisions. It is the plan sponsor’s responsibility to ensure that such information is provided to the participants by Aug. 30, 2012. This regulation applies to plans subject to the Employee Retirement Income Security Act (ERISA) and to church plans that elect to be subject to ERISA, and it requires an initial fee disclosure notice and quarterly communication regarding plan fees.
408(b)(2) Service Provider Disclosures
The third disclosure regulation pertains to ERISA section 408(b)(2) service provider disclosures to plan sponsors. The DOL's final rule requires plan sponsors to collect fee information from “covered service providers” (CSPs) that receive $1,000 or more from the plan for services. CSPs include ERISA fiduciaries and investment advisors, providers of recordkeeping and brokerage services allowing participant direction of investments, and providers of specific plan services (e.g., auditing, legal, consulting) expecting to receive direct or indirect payment from related parties. This regulation applies to ERISA and electing church plans and requires an initial fee disclosure notice and a regular communication regarding plan fees.
For the initial 408(b)(2) disclosure, a plan sponsor should confirm from each CSP the specific details of the fee arrangement, the nature of the provider relationship to the plan and any information regarding potential conflicts of interest. While there is no required format for the notification, the details must include the dollar amount of fees received from the plan or the schedule or formula used to determine the fee payment amounts.
For example, assume in a given year a CSP received $10,000 in compensation. This compensation was paid based on the amount of assets in the plan at a rate of 0.25 percent multiplied by the total plan assets. In this case, the provider may disclose the $10,000 it received or the 0.25 percent schedule.
The plan sponsor should confirm the services delivered to the plan by each CSP. As with the fee information, there is no specified format for this notification. Some providers will supply the plan sponsor with a document similar to a service agreement, listing each service provided. Others might include a breakdown of services in the body of an annual written report presented to the plan committee. Still others might reference different plan agreements or contracts that describe the services delivered, though not necessarily in one document.
Because of the regulation, which does not specify a format, any of these disclosure methods would be compliant. However, as part of the description of services delivered, the CSP must disclose whether it is a fiduciary to the plan. The plan sponsor must collect this information by July 1, 2012.
In addition, each CSP must distribute to the plan sponsor a notification of any change to the plan fees. This might occur if an investment option in the fund lineup were replaced. The fund replacement might change the underlying fees charged to the plan. The CSP is required to notify the plan sponsor of this change in writing within 60 days from the date that the provider becomes aware of these changes.
Having received all of this information, the fiduciaries of the plan are required to evaluate whether the fees are reasonable given the services delivered as well as to assess the potential for a conflict of interest. In order to determine if there is a possible conflict, the plan sponsor should request information regarding revenue-sharing arrangements the CSP might have with fund providers and follow up with questions or concerns.
After review of the fees and related services, if the plan fiduciaries believe that the value received is consistent with the fees paid, they should document in their meeting minutes their review and approval of the plan fees and services description. If they do not believe that the plan fees are justified by the services delivered, they must take actions to align plan fees and services better. These initiatives might include working with the provider to reduce fees or enhance services, or both.
The review might lead the plan sponsor to switch CSPs. Here again, all of the decisions and action steps taken by the plan fiduciaries should be documented in meeting minutes of the plan committee.
The reason plan sponsors must take all of these steps is to avoid prohibited transactions. The collection and review of this information provides the plan with an exemption from the prohibited transactions regulations for having CSPs paid out of plan assets. However, if the plan fiduciaries do not conduct this review, or if having determined that the fees are too high relative to services, and they fail to take appropriate action to resolve the disparity, any subsequent payments from the plan to the service provider in question can be construed as a prohibited transaction. This might subject the plan to disqualification.
In light of the requirements and potential penalties for failure to fulfill them, plan sponsors should consider taking the following steps:
• Identify all ERISA-covered service providers.
• Confirm who will be the contact to receive and maintain disclosure information.
• Review the disclosure from each CSP.
• Consider the reasonableness of the fees relative to the services delivered.
• Assess whether the revenue-sharing arrangements could cause a conflict of interest.
• Document the process taken.
• Follow up with nondisclosing providers; the DOL has instructions for escalation and reporting of service providers so that the plan fiduciaries may be protected from liability.
Earle W. Allen is vice president, retirement plan services, at Cammack LaRhette Consulting. He has 20 years of experience as an employee benefits consultant and is the compliance manager for the firm's New York office.
DOL Issues Policy on Electronic Disclosure of Participants' 401(k) Fees, SHRM Online Benefits Discipline, September 2011
DOL Aligns Deadlines for Retirement Plan Fee Disclosures, SHRM Online Benefits Discipline, July 2011
DOL Extends Effective Date for Fee Disclosure Rule, SHRM Online Benefits Discipline, February 2011
Clarity on Fees Coming Soon, HR Magazine, July 2011
SHRM Online Benefits Discipline
SHRM Online Retirement Plans Resource Page