To address the lack of fee transparency in the defined contribution market – 401(k), profit sharing and 403(b) plans – the Department of Labor (DOL) has taken the position that the plan sponsor, as a plan fiduciary, must understand how much is being paid for each service performed, that the services are appropriate, and that the amounts are reasonable.
In December 2007, the DOL proposed regulations under a three-pronged approach to enhance fee transparency relating to qualified retirement plans that have been, or will soon be, implemented. These three initiatives include:
- An updated Form 5500 Schedule C (effective with the 2009 filing)
- Fee Disclosure by Service Providers to Plan Fiduciaries (effective Apr. 1, 2012)
- Fee Disclosures by the Plan Fiduciaries to Plan Participants (effective for the first plan year, beginning on, or after, Nov. 1, 2011)
Most plan sponsors have already begun to comply with the first initiative by filing their 2009 Form 5500 Schedule C. Any plan service provider that received compensation from plan assets is required to disclose to the plan sponsor the amount and nature of service for which they are receiving compensation. The DOL will certainly take a much closer look at this information with the 2010 filings.
The second initiative, under The Employee Retirement Income Security Act of 1974 (ERISA) 408(b)(2), requires covered service providers to give the plan fiduciary disclosures that outline all services to be provided and all compensation (direct, indirect, non-monetary, etc.) earned by the service provider and any affiliates and/or sub-contractors of the service provider. The fee disclosures must also reflect the fiduciary status of the provider, fees related to the termination of their services, a reasonable and good faith estimate of the plan’s recordkeeping costs, and expense information relating to the plan’s investment alternatives (expense ratios, sales charges, redemption fees, wrap fees, etc.).
The final initiative addresses the DOL’s concern that participants are not provided with the necessary information to make informed decisions about their plan’s investment choices. Effective Jan. 1, 2012 for a calendar year-end plan, plan sponsors, under ERISA 404(a)(5), must now furnish annual and quarterly disclosures to all participants in participant-directed plans. The disclosures must include Plan-Related Information, such as:
- general information about the plan’s investment options;
- administrative expense information (plan level fees); and
- individual expense information (individual transaction-based fees).
Additionally, the disclosures must include Investment-Related Information, such as:
- performance data;
- benchmarking information;
- fee and expense information;
- an Internet website address; and
- a glossary to assist participants with investment terminology.
ERISA requires that plan fiduciaries, when selecting and monitoring service providers and plan investments, act prudently and solely in the interest of the plan’s participants and beneficiaries. A major responsibility of a plan fiduciary is to ensure that the plan’s fee arrangements with its service providers are “reasonable,” and that only “reasonable” compensation is paid out of plan assets for services provided to the plan. Several recent court cases have focused on this “reasonable” standard with mixed results for plan sponsors.
How Should a Plan Fiduciary Prepare?
As a plan sponsor and as the plan fiduciary, the following actions are recommended to comply with the new fee disclosures requirements:
- identify service providers;
- determine all applicable fees to which the plan is subject to;
- analyze the fees for reasonableness;
- document the process and the reached conclusions;
- discuss the expected timing, method and compliance of the disclosure requirements with services providers;
- communicate the plan fees with participants; and
- establish a process to periodically review service provider agreements for performance.
Taking the above steps may prevent having to answer some tough questions from plan participants once they receive their first quarterly statement in 2012 and are made aware of possible fee charges to their individual accounts. Let the rising and falling of gas prices keep the headlines, not the company’s 401(k) plan costs.