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UPDATE: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."
With changes in retirement plan fee disclosure on the horizon, strong fiduciary practices are becoming even more important for employers sponsoring 401(k) and other defined contribution plans.
For plan years starting after Nov. 1, 2011, the U.S. Department of Labor (DOL) will require that plans detail fees and expenses clearly on a quarterly basis. The intent is to allow participants to compare their investments and costs more readily so as to make better-informed decisions (see the SHRM Online article "Final Rule on 401(k) Fee Disclosure to Participants Seen as 'ReasonedApproach'").
Although the disclosure rule takes effect for most plans in January 2012, plans sponsors are likely to begin to comply in 2011 to ensure that they are meeting their fiduciary responsibilities to participants and are prepared to fulfill new requirements.
The 411 on 401(k) Disclosure
In a nutshell, plan administrators will be required to provide employees in writing—and online—investment performance and fee information in a format that allows participants to compare all available funds easily. The first step is for the employer’s investment committee to have strong fiduciary practices. The plan’s fiduciaries have a duty to act prudently in the sole and exclusive interest of the plan’s participants and beneficiaries, which includes:
• Avoiding conflicts of interest.• Properly diversifying the plan’s assets.• Ensuring that the plan pays only reasonable and necessary fees and expenses.
• Avoiding conflicts of interest.
• Properly diversifying the plan’s assets.
• Ensuring that the plan pays only reasonable and necessary fees and expenses.
Performing these duties is not always easy, as many plans are bundled and fees might be hidden rather than broken out for easy comparison. Investment committees should review their funds’ investment performance and check fees regularly, even when service contracts with vendors don’t identify charges for recordkeeping or other administrative duties that employers sometimes mistakenly think are free.
The new regulations require that:
• Workers receive complete information on all fees and a description of what the fees are for, along with other investment information typically contained on fund “fact sheets,” including investment objectives, investment returns and risks.• Plan administrators disclose to participants the amount of plan-related fees and expenses deducted from their accounts, expressed as a percentage and as a dollar amount for each $1,000 invested.• Plans present current, one-year, five-year and 10-year performance figures, compared to relevant benchmarks.
• Workers receive complete information on all fees and a description of what the fees are for, along with other investment information typically contained on fund “fact sheets,” including investment objectives, investment returns and risks.
• Plan administrators disclose to participants the amount of plan-related fees and expenses deducted from their accounts, expressed as a percentage and as a dollar amount for each $1,000 invested.
• Plans present current, one-year, five-year and 10-year performance figures, compared to relevant benchmarks.
Fees charged against an employee's account must be included in the account holder's quarterly statement. The fee can be expressed as one number, but plan participants have the right to request more details from the plan administrator.
Salient aspects of the new fee disclosure requirements include:
• Making available a chart that allows eligible employees to compare their investment funds’ performance with a benchmark.• Offering at least one low-cost index fund to plan participants in order to receive protection against liability for participants' investment losses.• Disclosing financial relationships among plan administrators and service providers to demonstrate that there is no conflict of interest.
• Making available a chart that allows eligible employees to compare their investment funds’ performance with a benchmark.
• Offering at least one low-cost index fund to plan participants in order to receive protection against liability for participants' investment losses.
• Disclosing financial relationships among plan administrators and service providers to demonstrate that there is no conflict of interest.
The Investment Committee's Role
These changes underscore the role of the plan sponsor's investment committee in establishing a process of governance and oversight of a 401(k) plan’s investment options. Far too often, in the absence of a committee, a plan sponsor might have one or two upper-management executives eyeball a fund review prepared by the financial firm acting as service provider. However, the DOL has made it clear that this does not constitute an independent review or the due diligence necessary to satisfy the plan sponsor’s fiduciary obligations. In fact, this lack of sound business policies can open up the company to complaints to the DOL or to lawsuits from plan participants and their beneficiaries.
Committee members. Typically, the composition of an effective investment committee includes a number of senior company executives—possibly the CEO at smaller firms, but typically the CFO, heads of operations and HR. The number of committee members can be a fine balancing act; too many might result in little accomplishment, while too few could cause a lack of perspective. Moreover, if the company does not have the expertise internally to perform the required due diligence, it has a legal obligation to seek “prudent experts” to advise it on these matters.
Committee obligations. A company’s investment committee is not a mere titular panel—each member has a personal fiduciary responsibility, and personal liability, in the event of plan losses. As such, each member of the investment committee must have a thorough understanding not only of their fiduciary responsibilities but also of:
• The committee’s policies and procedures.• Plan expenses and fees.• The performance, risk, appropriateness and expenses of each of the plan’s investment options compared against a benchmark.
• The committee’s policies and procedures.
• Plan expenses and fees.
• The performance, risk, appropriateness and expenses of each of the plan’s investment options compared against a benchmark.
Impact of the New Regulations
The investment committee should meet formally at least four times a year to monitor all investment options, take notice of changes and discuss thoroughly all factors that might affect a fund's appropriateness for employees. The DOL's fee disclosure rule could prompt additional meetings during the year as the need to update contracts with third-party plan administrators, custodians, record keepers and other service providers will increase.
The new requirements will create the need for investment committees to examine their charters and investment policies statements and to determine whether revisions are needed to address any increased fiduciary responsibilities.
Bob Auditore is a principal at Bay Colony Partners, a privately held independent retirement planning firm specializing in the development of process driven plans and strategies for companies and individuals. Paul Escobar is the firm’s senior vice president and a retirement and wealth management specialist.
Non-Mutual Fund Investments Complicate Fee Disclosure, SHRM Online Benefits Discipline, December 2010
Final Rule on 401(k) Fee Disclosure to Participants Seen as 'ReasonedApproach', SHRM Online Benefits Discipline, October 2010
Developing a 401(k) Investment Policy Statement, SHRM Online Benefits Discipline, January 2008
How to Conduct a Retirement Plan Assessment, SHRM Online Benefits Discipline, January 2008
401(k) Fees Matter: Tips for Reining Them In, SHRM Online Benefits Discipline, August 2007
What Matters Most? An Analysis of Investment Committee Hire/Fire Decisions, Vanguard Investments, December 2010
Will DOL’s New Mutual Fund Fee Disclosures Mislead 401k Investors?, Fiduciary News, December 2010
SHRM Online Benefits Discipline
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