DOL Issues Interim Final Rule on Disclosing Retirement Plan Fees

New rule covers fee disclosures that service providers must make to plan sponsors

By Stephen Miller Jul 16, 2010

Update on Fee Disclosure Deadlines

The U.S. Department of Labor (DOL) issued a final rule in July 2011 that extended by three months the applicability date of the department's interim final rule on fee disclosures by plan service providers to plan sponsors/fiduciaries (known as ERISA section 408(b)(2) disclosures), and aligns that regulation with the DOL's final rule on fee disclosures to plan participants. The effective date for service provider fee disclosures to plan fiduciaries is now April 1, 2012 (See the SHRM Online article "DOL Aligns Deadlines for Retirement Plan Fee Disclosures.")

The DOL's final rule requiring quarterly fee disclosure reports to plan participants who direct their own investments in ERISA-covered 401(k) and other individual account retirement plans applies to plan years beginning after Oct. 31, 2011, with a 60-day transition rule that permits initial compliance no later than 60 days after the beginning of the first plan year after Oct. 31, 2011.

The U.S. Department of Labor (DOL) issued a long-awaited interim final rule to enhance disclosure of service providers' fees to fiduciaries of 401(k) and other retirement plans. The rule was published in the Federal Register on July 16, 2010.

Fees and expenses charged to plan accounts can add up over time to take a substantial bite out of participants’ retirement savings. The rule is intended to help fiduciaries determine the reasonableness of compensation paid to plan service providers and identify conflicts of interest that might impact a service provider’s performance under a service contract or arrangement. [A separate DOL final rule, published in the Oct. 20, 2010 Federal Register, addresses required disclosure of fees by plan sponsors to plan participants; see "Final Rule on 401(k) Fee Disclosure to Participants Seen as 'Reasoned Approach."]

“This regulation will give fiduciaries valuable information about compensation and revenue sharing, and the disclosure of this information will benefit millions of participants and their families,” said U.S. Secretary of Labor Hilda L. Solis in a statement.

“Improving disclosure will mean that plan fiduciaries can make more informed decisions about important plan services, the cost of the services and the potential conflicts of interests that their service providers may have,” added Phyllis Borzi, assistant secretary for the Labor Department’s Employee Benefits Security Administration.

Bundled and Unbundled Services

“These new fee disclosure rules benefit both plan sponsors and providers,” commented Brian Graff, executive director of the American Society of Pension Professionals & Actuaries, noting that the disclosure requirements will be applied in a uniform manner to all retirement service providers, regardless of how plan services are delivered.

“In order to meet their fiduciary responsibilities under ERISA [Employee Retirement Income Security Act], plan sponsors need to make an ‘apples to apples’ comparison of the fees charged by retirement plan service providers,” Graff noted. “Providers now have clear guidance on what disclosures are required, and plan sponsors will have the information they need to make informed choices about their retirement plans,” he added. “Complete and consistent fee disclosure, including the specific requirement for the disclosure of fees associated with recordkeeping services, is now the standard for both bundled and unbundled service providers. By promoting fair competition, these new fee disclosure requirements will help ensure that the fees paid by plan sponsors and participants for retirement plan services are reasonable.”

Over the years, Congress has attempted, and failed, to pass comprehensive fee disclosure legislation. Among its latest efforts, a provision to require providers to disclose fees in defined contribution plans was included in a congressional tax extenders bill introduced in June 2010. But partly because of concerns over a conflict with the impending DOL rule, the legislative provision was dropped from the tax measure.

Focus on Service Providers

According to a DOL fact sheet, the new rule:

Applies only to defined contribution and defined benefit pension plans, and focuses on the disclosure of the direct and indirect compensation certain service providers receive, including fees deducted from plan assets.

Applies to plan service providers that expect to receive at least $1,000 in compensation in connection with their services and that provide certain fiduciary or registered investment advisory services; recordkeeping or brokerage services to a participant-directed individual account plan in connection with the investment options made available under the plan; or certain other services for which indirect compensation is received.

Focuses on service providers and compensation arrangements that are most likely to raise questions for plan fiduciaries with respect to the amount of compensation being received by a service provider for plan-related services and potential conflicts of interests that might compromise the quality of those services.

Includes a class exemption from the prohibited transaction provisions of ERISA for a plan fiduciary who enters into a contract without knowing that the service provider has failed to comply with its disclosure obligations.

Types of Disclosure

Disclosure requirements under the rule include the following:

Information required to be disclosed by plan service providers must be furnished in writing to the plan fiduciary. The rule does not require a formal written contract delineating the disclosure obligations.

Information that must be disclosed includes a description of the services to be provided and all direct and indirect compensation to be received by the service provider, its affiliates or subcontractors. Direct compensation is compensation received directly from the plan. Indirect compensation generally is compensation received from any source other than the plan sponsor, the covered service provider, an affiliate or subcontractor.

Because certain services and costs are so significant or present the potential for conflicts of interest, information concerning those services and costs must be disclosed without regard to whether services are furnished as part of a bundle or package. For example, service providers must disclose whether they are providing recordkeeping services and the compensation attributable to such services, even when no explicit charge for recordkeeping is identified as part of the service contract.

Service providers must disclose whether they are providing any services as a fiduciary to the plan.

• Information must be disclosed about plan investments and investment options. These disclosure obligations are placed on the fiduciaries to investment vehicles that hold plan assets and on recordkeepers and brokers who, through a platform or other mechanism, facilitate the investment in various options by participants in individual account plans, such as 401(k) plans.

Class Exemption

The interim final rule includes a class exemption to address situations in which a plan fiduciary discovers an error or deficiency in the service provider's disclosure. If the fiduciary "reasonably believed" that the service provider had disclosed the information required by the rule, relief is available by requesting in writing that the service provider furnish the missing information within 90 days.

If the service provider fails to comply with the fiduciary’s request within 90 days, the fiduciary must notify the DOL. "The department believes that this condition, along with a covered service provider’s exposure to excise tax liability under the [tax] code, will provide covered service providers with a sufficient incentive to address disclosure failures within a reasonable time," the regulation states.

Review Fee Documents

With the issuance of the interim final rule, plan sponsors have an opportunity to review fee communications and documentation from their service providers and to seek further details regarding fee deductions from plan assets. The DOL has posted a model notice for requesting that service providers provide any missing or incomplete information regarding compensation received from the plan.

Stephen Milleris an online editor/manager for SHRM.

Related Articles—External:

New Participant Fee Disclosure Rules: What Plan Sponsors Need to Know, The Principal Financial Group, January 2011

10 Things 401(k) Providers Won't Tell You, Smart Money, June 2010

Related Articles—SHRM:

Final Rule on 401(k) Fee Disclosure to Participants Seen as 'Reasoned Approach',SHRM Online Benefits Discipline, October 2010

Understanding New DOL Rules on Retirement Plan Fee Disclosure (by service providers to plan sponsors),SHRM Online Benefits Discipline, September 2010

401(k) Participants Want Fee Summary, Not Detailed Disclosure,SHRM Online Benefits Discipline, July 2009

DOL Proposes Rule to Improve 401(k) FeeDisclosure, SHRM Online Benefits Discipline, July 2008

Plan Sponsors’ Mixed Perspectives on FeeDisclosure, SHRM Online Benefits Discipline, April 2008

401(k) Fees Matter: Tips for Reining Them In, SHRM Online Benefits Discipline, August 2007

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