In 2012, New Disclosure Regulations Will Shine a Light on 401(k) Fees

Planning can minimize employee confusion

By Tom Reese, Conrad Siegel Actuaries January 2, 2012

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."

For years, participants in employer-sponsored 401(k) plans have received statements that include fund balances and changes in value since the prior period, and in most cases there is no mention of fees paid from their account.

Plan sponsors, service providers and participants are in for some big changes in 2012, when the U.S. Department of Labor (DOL) will begin enforcing new regulations surrounding fee disclosure for defined contribution retirement plans regulated under the Employee Retirement Income Security Act (ERISA).

The new regulations require providers to disclose fully explicit fees paid by plan participants on their quarterly statements and to provide an annual disclosure highlighting investment fees. In addition, the regulations require service providers to supply employers with a services agreement and full disclosure of all fees.

Overall, the changes are positive in that individuals and employers will gain full transparency regarding fees. However, plan sponsors need to prepare for the changes and communicate well in advance with plan participants or they might have some surprised and upset employees on their hands.

Developments in 2012

The changes will be twofold.

Under a February 2012 DOL final rule, the first change goes into effect by July 1, 2012. It requires service providers to present plan sponsors and fiduciaries with a services agreement for the 401(k) plan. Plan sponsors have a responsibility to have a due diligence process in place to evaluate these fees for reasonableness. Without this process, plan fiduciaries could be held liable personally.

The second change involves plan participants directly. Plans must furnish their first set of fee disclosures to participants by Aug. 30, 2012 — 60 days after the July 1 effective date of the service provider disclosure regulation. In addition, fees and expenses paid by participants must appear on the quarterly statement (for fees incurred July through September), to be furnished no later than Nov. 14, 2012 — the 45th day after the end of the third (July-September) quarter.

For many participants, this will be the first time they receive information about all of the fees they are being charged. These fees might come as a shock to some who have had no idea how much they’ve been paying in service charges over the years; the fees carry the potential to cause some backlash.

Steps to Take

Employers need to plan and think about how their employees are going to react to these changes and how to inform participants responsibly to minimize the surprise factor. If your HR team manages or helps implement the company’s 401(k) plan, here are a few things you should do:

Obtain a copy of the 401(k) services agreement from service providers. Ask them what systems and processes they have to help inform employees about the upcoming fee disclosures.

Evaluate all fees. Once the services agreement is in hand, plan sponsors have a duty to evaluate the fees and do their best to determine if the fees are reasonable and in the best interest of employees. HR needs to know exactly what services are being provided, at what cost, and why they’re valuable—and to feel comfortable explaining and justifying these fees to employees.

In many cases, the largest fees are paid from the plan investments. However, many employers think that they are receiving services that are free. HR or the financial leadership of the company will need to look at these investment fees closely, as sometimes they can be difficult to understand. Question providers thoroughly so you can answer employee questions forthrightly.

If uncertain whether the fees are reasonable, your organization might need to take additional steps to benchmark the fees against other providers in the marketplace.

Explain the process.When providing employees with an explanation of the charges to their account, explain the process that the organization and the HR department went through to ensure that the fees are reasonable.

Generally speaking, increased transparency is a good thing for the 401(k) industry and for employers and plan participants. What’s most important is advanced diligence and communication from the employer so that employees aren’t blindsided the first time they see a statement with fees that some had no idea they were paying.

Tom Reese is a partner with Conrad Siegel Actuaries, a provider of employee benefit consulting and administrative services, and has been with the firm since 1997. He is a specialist in retirement plan consulting, administration and employee communications.

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