Fee Disclosure: What 401(k) Plans Can No Longer Hide

By Pat Look, J.J. Keller & Associates Inc. February 1, 2011

Updated 2/3/2012


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."

Employers and employees will gain a much better understanding of the behind-the-scenes workings of 401(k) and other defined contribution plans as the result of two regulations issued by the Employee Benefits Security Administration (EBSA). The regulations' aim is to help employers/plan sponsors and employees/participants make better decisions when it comes to selecting and managing investments held in participant-directed retirement plans.

Assistance to Employers

An EBSA interim final rule relating to fee disclosure from service providers to employers that sponsor 401(k)-type plans was originally to take effect July 16, 2011. However, EBSA invited public comments on the regulation and subsequently announced its intention to delay the effective date until Jan. 1, 2012.

This rule places more requirements and responsibilities on plan service providers, but the end results will benefit plan sponsors. It should provide plan sponsors with the information they need to make educated decisions when selecting and monitoring service providers for their plans. This information has been difficult—if not impossible—to obtain.

The interim final rule makes clear the disclosure requirements that service providers must give to plan sponsors. They include:

A written disclosure (as opposed to a formal detailed written contract, as originally proposed).

A description of the services to be provided.

Documentation of direct and indirect compensation to be received (a separate cost disclosure of recordkeeping services if multiple or bundled services are provided).

Disclosure as to whether they are providing fiduciary services.

Information about plan investments and options.

Because the differences between direct and indirect compensation have always been a bit uncertain, the rule attempts to clarify them. It defines direct compensation as that which is received directly from the plan. Indirect compensation, on the other hand, refers to income paid from any source other than the plan sponsor, the service provider, an affiliate or a subcontractor.

In addition, the categories for service providers have been modified. They include fiduciaries, investment advisors, and recordkeepers or brokers, as well as those who receive indirect compensation.

Moreover, the rule addresses conflicts of interest. The new disclosure requirements should discourage conflicts of interest that might affect the service providers’ performance and help plan sponsors stay more informed in the decision-making process because they will have the tools needed to evaluate the reasonableness of contracts and fees. Plan sponsors might take comfort knowing that they may receive an exemption if they enter into an agreement unintentionally with a service provider that does not comply with its disclosure obligations.

Assistance to Employees

An EBSA final rule that addressed fee disclosure from employers to participants in 401(k)-type plans takes effect for plan years beginning after Oct. 31, 2011. Calendar year plans will need to comply by Jan. 1, 2012.

The rule requires providing participants with clarification as to how their plans work and how much they cost. Such information typically has been difficult to find; most participants previously had access only to the bare minimum. As a result of the new regulation, plan sponsors soon will be required to provide several new disclosures to participants. The regulation addresses three main areas: plan information, investment information and comparative data.

Plan information. Plan participants must understand how the plan works. General plan information must be furnished to participants in an easy-to-understand format before they can direct their investments. It must be provided annually thereafter.

Participants need to be informed of any administrative fees or expenses that the plan deducts from their account, as well as any individual fees or expenses that can be charged to them as a result of their actions (e.g., taking loans, implementing a qualified domestic relations order or using employer-provided investment advice). Quarterly statements must be supplied showing the dollar amount of participants’ accounts and including an explanation of the fees and expenses that were deducted from their account.

Investment information. To make informed decisions about available investment options, participants must be provided with:

Performance data (one-, five- and 10-year returns if available).

Benchmark data for comparing similar securities, fees or restrictions that might apply if they buy or sell the investments.

A website where they can obtain additional investment information.

A glossary of terms to help them decipher the unfamiliar investment language.

Providing a website for participants ultimately is the plan sponsor’s responsibility. However, each situation may differ depending on the degree of responsibility assumed by the service provider or investment company. If inaccurate or incomplete information is provided by the service provider or investment company, the plan sponsor will not be held liable if it relies in good faith on their services.

Comparative data. EBSA has provided a model comparative chart that employers must emulate, listing each of the plan’s investment options. By using a standard format, workers will be able to do an apples-to-apples comparison of the investment products available to them.

Standard methods of calculating fees, expenses and investment returns must be used in order to achieve uniformity over all investment products.


Implementation of the first interim final rule regarding disclosure requirements to plan sponsors will certainly cut down the time and expenses typically associated with plan sponsors obtaining fee information about their plans. Likewise, the second rule will benefit participants in making wise investment decisions based on all the facts.

With both rules in place, defined contribution plans may become less of a mystery to both employers and employees.

Patricia Look has been the editor of the BottomLine Benefits & Compensation newsletter for J.J. Keller & Associates since its inception in 2007. She has worked in benefits and compensation management, with a focus on retirement plans and executive compensation, for over 25 years. In particular, her expertise includes 401(k) plans, qualified pension plans, deferred compensation and supplemental plans for executives.​

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