DOL Proposes Enhanced 401(k) Fee Disclosure

Service providers asked to provide 'road map' to voluminous disclosure documents

By Stephen Miller, CEBS March 12, 2014

updated on 3/21/2014

The Department of Labor (DOL) is seeking public comments on a proposed rule that would require service providers for 401(k) and other defined contribution retirement plans to supply employers with a guide for navigating the providers' sometimes-voluminous fee-disclosure documents under a prior DOL rule.

The new rule was published in the Federal Register on March 12, 2014. The DOL also posted a related fact sheet on the proposal, which the public may submit comments on through June 10.

“The department’s recent fee-disclosure rules were a good first step in bringing transparency to the 401(k) industry and disclosing potential conflicts of interest,” said Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi during a March 11 teleconference announcing the proposal. “However, some employers, particularly small businesses, may be having a hard time locating the required fee disclosures when they are embedded in lengthy or complex documents. Much like a road map, a guide can help employers locate fee information, which will help them better understand what they are being charged by financial services providers.”

New Disclosure to Explain Current Disclosure

In 2012 the DOL published a final rule under Section 408(b)(2) of the Employee Retirement Income Security Act requiring companies that provide certain services to employer-sponsored 401(k)-type plans to release detailed information about their services and the compensation they will receive, including payments from third parties. The rule allows such companies to use existing contracts and other documents to provide this information to plan fiduciaries.

A related final rule requires plan sponsors to communicate fee information to plan participants every quarter. (An overview of the agency's fee-disclosure requirements can be found in the SHRM Online article 401(k) Fee Disclosures: A Top 10 List of Issues.)

According to the new proposed rule, covered service providers would have to release a guide if disclosures were made using multiple or lengthy documents. If a guide were required, the service provider would have to direct employers to the place in the disclosure documents where they could find the following:

  • A description of services to be provided.

  • A statement concerning services to be provided as a fiduciary and/or as a registered investment adviser.

  • A description of all direct and indirect compensation, any compensation that will be paid among related parties, compensation for termination of the contract or arrangement, as well as compensation for record-keeping services.

  • The required investment disclosures for fiduciary services and record-keeping and brokerage services, including annual operating expenses and ongoing expenses or, if applicable, total annual operating expenses.

The notice also announced that the DOL will put together focus groups of fiduciaries of retirement plans with fewer than 100 participants to explore current practices and the effects of the 2012 fee-disclosure rules. "The focus groups may provide additional information about the need for today’s proposal and what disclosure formats may be most useful to plan fiduciaries," Borzi said.

Complexity Overwhelmed Clarity

"What next, a guide to understanding the guide to understanding the fee disclosure documents?,” Rick Meigs, president of, commented to RIABiz, a news and information website for registered investment advisers and other financial services providers.

Employee Fiduciary, a 401(k) recordkeeper for small businesses, submitted a comment letter to the DOL stating it welcomes the attention to improving fee disclosure, “particularly for small business plans where the need is great.” However, the service provider “does not agree with the suggestion by Secretary Borzi to simply include a summary on top of the existing disclosure, which would amount to nothing more than a table of contents. The proposal would just add another layer to an already complex disclosure process,” Greg Carpenter, Employee Fiduciary's CEO, told SHRM Online.

Pointing to the lack of a standardized disclosure format that makes it “difficult to impossible for a plan fiduciary to compare fees between service providers, particularly when indirect compensation arrangements exist,” Carpenter said that a standardized disclosure summary, formatted to include particular disclosure items, “would be in the best interest of plan fiduciaries and participants,” and included an alternative disclosure template in his firm's comment letter.

Despite such criticisms, the DOL asserted its commitment to requiring additional documentation to help clarify disclosure materials produced under its previous rule.

"We actually think that the [2012 service provider's fee disclosure] rule has been successful in its short history in shedding additional light on fee practices, but we also think that this rule can be improved," Borzi said during the DOL's teleconference. "This proposal is designed to address the question that the rule doesn't mandate a particular format for fee disclosures. … We're troubled that some employers or fiduciaries are having a hard time locating the required fee disclosures when they're embedded in these lengthy or complex documents."

"Employers are having a hard time locating
required fee disclosures embedded in
lengthy or complex documents."
-- Assistant Labor Secretary Phyllis Borzi


Unmet Expectations

The 2012 regulations were enacted with the expectation that clearer fee disclosure by service providers to plan sponsors, and then by plan sponsors to plan participants, would prompt participants to encourage their employers to negotiate plans with lower administrative and fund fees. The DOL also expected that participants would use the disclosures to select lower-fee options within their plans.

But recent surveys suggest employees are mostly ignoring the fee disclosures that took effect in 2012 (see, for example, the SHRM Online article Survey: Fee Disclosure Has Little Impact on 401(k) Participants). Critics have also complained that the required disclosures are burdensome and costly to produce, putting upward pressure on the very provider fees they are meant to document.

"As I go around the country and talk to groups about our fee-disclosure regs, the first thing I say is, 'Please open the envelope. Please, if you get it electronically, click on the link.’ It's really hard to get people to focus on it," said Borzi.

"People have been impatient," she added. "From just a few months after the rule first became effective, we starting seeing employer surveys or service-provider surveys saying the rule is a failure because people didn't swarm the offices of the recordkeepers to change their investment options. These things take a long time, and there's no magic bullet for us to make people read and understand this stuff."

Concluded Borzi, "We are looking at a wide variety of potential ways to see if we can measure the benefit" of fee disclosure—"but it's not going to be an easy task."

Stephen Miller, CEBS, is an online editor/manager for SHRM.

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