Compass Newsletter - Articles

Fee Disclosure Requirements Hit Retirement Plans

By David M. Roth
(Summer 2011)

Over the last several years, the Department of Labor has been working on two sets of regulations that require the disclosure of relevant retirement plan information. If you or your company sponsor a qualified retirement plan, the first set of regulations (known as the Service Provider Fee Disclosure Regulations) deal with disclosures you might receive from plan service providers, while the second set (known as the Participant Fee Disclosure Regulations) deal with disclosures you may have to give to plan participants.

The Service Provider Fee Disclosure Regulations. As a general rule, a retirement plan may not enter into an arrangement with a service provider unless the arrangement is “reasonable.” Under the new regulations, which become effective April 1, 2012, no contract for services between a “covered plan” and a “covered service provider” will be considered “reasonable” unless the service provider makes various disclosures to the plan sponsor/fiduciary. Specifically, the service provider must describe the services it will provide, must indicate that it will be acting as a plan fiduciary (if the services provided are fiduciary services), and must specify the amount of expected compensation (both direct and indirect) for its services. If the service provider provides multiple services, it should separately disclose the cost of each service.

The final regulations define a “covered plan” as all ERISA-governed retirement plans. “Covered service providers” include both firms and individuals (as well as their affiliates and subcontractors) providing fiduciary services, investment services, recordkeeping or brokerage services, and accounting services to a covered plan, as long as the service provider reasonably expects to receive $1,000 or more of compensation, directly or indirectly, in exchange for its services. However, providers of recordkeeping services are not covered by the regulations if they receive direct compensation.

In light of the above, plan sponsors using “bundled” services (i.e., a single service provider for plan document, administrative, reporting, and investment services) should expect to begin receiving reports from their service providers in the near future. Sponsors using “unbundled” services (i.e., separate service providers for each of the above services) may also receive reports, depending on how compensation arrangements are structured. If the reports you receive do not clearly disclose the items noted above or if your service provider fails to make the required disclosures, the arrangement may not be considered “reasonable.” In that event, we would suggest that you contact the service provider and discuss this disclosure obligation with them, as a penalty tax may be imposed by the DOL for non-compliance.

The Participant Fee Disclosure Regulations. If you or your company sponsor a 401(k) plan that allows plan participants to direct the investment of their plan accounts [as opposed to a “pooled” account invested by the plan trustee] the Participant Fee Disclosure Regulations [also referred to as the “404(a) regulations”] will most likely apply to you. Only owner-only plans [sometimes called “Solo 401(k) plans”], IRAs, SEPs, SIMPLE IRAs, and plans in which a trustee directs plan investments are exempt.

The 404(a) regulations also become effective in 2012. Under these regulations, a plan sponsor must disclose certain information to participants on or before the date a participant can first direct his or her investments, and must provide annual disclosures thereafter. Required disclosures include an explanation of the circumstances under which participants may direct their investments, any limitations on investment direction under the plan, identification of any designated investment alternative under the plan and of any designated investment manager, and information relating to administrative expenses and individual expenses charged to the participant. In addition, the participant must receive quarterly statements disclosing the dollar amount of fees and expenses charged to his or her account.

Plan sponsors can satisfy several of the required disclosures themselves by providing new plan participants with a copy of the sponsor’s policy regarding participant directed investments. Other required disclosures (specifically those related to fees and expenses) may be satisfied by the plan’s fund provider or third-party administrator. We would suggest that affected plan sponsors take the lead in discussing these requirements with the professionals providing plan services, and together decide on a workable approach to satisfying these disclosures. Failing to do so could result in the sponsor losing fiduciary protections currently in place.