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401(k) Fee Disclosures: A Top 10 List of Issues
 

By Nancy Gerrie, McDermott Will & Emery LLP  7/27/2012
Nancy Gerrie

By July 1, 2012, plan sponsors should have received fee disclosure data from their plan service providers under the U.S. Department of Labor's (DOL) final rule, Reasonable Contract or Arrangement Under Section 408(b)(2) – Fee Disclosure.

By Aug. 30, 2012, plan sponsors must disclose plan facts and investment fees to participants, including a summary of the administrative and individual expenses charged against participant accounts, under the DOL's final rule Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans.

By Nov. 14, 2012, plan sponsors must issue the first of required quarterly statements of fees deducted from individual accounts, initially reflecting fees deducted during the third quarter.

Below are 10 questions to consider in complying with the new rules, plus answers to these common uncertainties.

1. What are the required disclosures?

The required disclosures are intended to answer the question, “How much am I paying for my 401(k) plan?” Providing participant-level disclosures is the fiduciary responsibility of plan administrators, and while some plan sponsors are preparing their own participant-level disclosures, most are relying on their 401(k) vendors to prepare the participant-level disclosures for them.

In contrast, plan-sponsor-level disclosures were due to be sent from vendors to plan sponsors by June 30, 2012, and do not need to be furnished to plan participants. These vendors include plan record-keepers, trustees, brokers and investment advisers. The plan-sponsor-level disclosures give plan sponsors additional information about plan fees that participants do not receive, such as the cost to terminate the contract, the types of direct and indirect compensation the vendor receives from the plan or third parties and the location of that information in the vendor’s master services agreement with your company.

2. Can I rely on the disclosures given to me by my vendors?

No. Providing participant-level fee disclosures is a plan sponsor’s fiduciary responsibility under the Employee Retirement Income Security Act (ERISA), so carefully review vendors’ participant-level fee disclosures. The disclosures require both quantitative information and narrative descriptions of various plan features and expenses.

The DOL regulations allow plan sponsors to rely in good faith on the disclosures that are given to them by their vendors, and while this may protect them from having to question details for which they have no other source of information (for example, dollar amounts of expenses), it is likely that the good faith standard will not protect them from liability for sending out erroneous or overly vague information without review. As a result, consider whether to provide supplementary disclosures to wrap around your vendors’ template disclosures in order to protect yourself from fiduciary liability.

3. What if the disclosures have gone out to my plan participants already?

If vendors sent out the participant-level disclosures directly to participants without waiting for affirmative approval from plan sponsors, the plan sponsor should request a copy of the disclosures and review them so that they are prepared to answer participant questions (see question 4, below). Plan sponsors might not be able to change what has been sent out, but they can be prepared to respond to participant feedback. Also, they should consider whether they need to supplement their vendors’ disclosures.

4. Will plan participants have questions and concerns about the disclosures?

The participant-level fee disclosures required by the new regulations are extremely long and detailed, especially for plans with numerous investment options. Some plan sponsors predict they will be inundated with questions from participants after receiving the disclosures. Others believe that participants will be so confused that they will not ask any questions at all. The outcome will likely depend on a particular plan’s participant makeup. Also, record-keepers now must give plan sponsors an estimate of their fees, even if those fees are completely offset by revenue-sharing payments.

Review all disclosures and try to anticipate participant questions such as “I always thought that investing in my 401(k) plan was free, but now I see that there are administrative fees?” or “What are ‘revenue sharing payments’?” Consider providing training on the disclosures for any benefits staff (or call center representatives) who might be asked about the disclosures by participants.

5. Who is required to receive the new disclosures, and how?

Plan sponsors must provide the disclosures to all eligible employees, including new hires and those employees who are eligible for but not participating in the plan. If you intend to distribute the fee disclosures electronically, make sure to review the DOL’s new rules that specifically address how electronic disclosure requirements apply to the new participant-level fee disclosures.

6. What should I do if the “benchmark” for a particular investment option that vendors are using for the participant fee disclosures is different from the benchmark used for that option in my plan’s investment guidelines?

If your 401(k) plan investment guidelines are shared with participants, review the benchmarks for any discrepancies and be prepared to explain them to participants. Also consider the implications of these “dueling benchmarks” to your investment guidelines at the next 401(k) committee meeting.

7. Do I have to provide fee disclosure information for all of the investment options in my plan, including “brokerage windows” or “mutual fund windows” and company stock funds?

Plan sponsors need to provide the full DOL fee disclosures for their designated investment alternatives (DIAs), but not all of the plan's investment options may constitute DIAs. If the 401(k) plan offers a “brokerage window,” be aware that there are separate reporting requirements for these and similar arrangements (in May 2012, the DOL issued Field Assistance Bulletin 2012-03, which, in Question 30, indicated that plan sponsors have a greater fiduciary responsibility toward investment options contained in a brokerage window platform than many had previously assumed).

If the plan offers company stock, check the disclosure requirements carefully and give special consideration to the benchmark used for this investment option.

8. What should I do with the plan-sponsor-level disclosures I received from my 401(k) plan vendors?

Once you receive the fee disclosure statements from vendors, your 401(k) committee should discuss the disclosed fees, consider whether they are “reasonable” and assess whether there are any conflicts of interest. In some cases it may be prudent to benchmark the fees to confirm they are reasonable in the current marketplace. Consider whether it is necessary to do a formal request for information or request for proposal to assess the fees paid by the plan.

9. Will the new rules affect my other plan documents?

If your contract or agreement with vendors/service providers is more than a year or two old, consider updating it so that the vendor affirmatively agrees to provide the fee disclosures required, along with other representations they need to make. It is also a good idea to review the plan’s investment guidelines or policy, the summary plan description and other plan and trust documents to see if any updates are needed.

10. Are there new disclosure rules that apply to quarterly participant account statements?

Yes. The DOL also issued new rules for what must be disclosed in participants’ quarterly account statements. Drafts of the new quarterly statements should be coming from your vendors soon and should be reviewed for compliance with the new rules. The new quarterly statements are required beginning in the third quarter of 2012 (but no later than Nov. 14, 2012).

Nancy Gerrie is a partner at the law firm of McDermott Will & Emery LLP and the partner-in-charge of the firm’s Chicago office. She works with corporations, partnerships, limited liability companies and tax-exempt entities on a variety of retirement plan and other employee benefit plan matters, including the design, amendment, administration and termination of pension, profit sharing, 401(k), employee stock ownership and welfare and benefit plans.

Numbering more than 1,000 lawyers McDermott Will & Emery LLP is an international law firm with a diversified business practice.

© 2012 McDermott Will & Emery LLP. All Rights Reserved. Reposted with permission.

This article should not be construed as legal advice.

Related SHRM Articles: 

DOL Provides Help for Tardy Vendor Fee Disclosures, SHRM Online Benefits Discipline, July 2012

Tips on Communicating 401(k) Fees, SHRM Online Benefits Discipline, April 2012

A Checklist for Participant Fee Disclosures, SHRM Online Benefits Discipline, March 2012 

Related External Article:

Armed with Fee Info, Plan Sponsors Bailing on Service Providers, InvestmentNews.com, July 2012

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