• U. S. Department of Labor Releases Final Component of 401(k) Fee Disclosure Rules: Transparency But at What Cost?
  • December 29, 2010 | Author: Daniel L. Meehan
  • Law Firm: Miles & Stockbridge P.C. - Baltimore Office
  • Transparency of retirement plan expenses has been a hotly debated topic within the United States Congress, among regulatory agencies, and between litigants in recent years. Specifically, the United States Department of Labor (DOL), the federal agency with enforcement jurisdiction under the Employee Retirement Income Security Act of 1974, as amended (ERISA), and many members of Congress have for a long time wanted to increase transparency in service provider fees.  The belief was that many participants simply did not know how much their plan accounts were being charged in fees and that whatever fee information was available was provided too piecemeal by the plan administrator.  The losses caused by the global recession, coupled with a tide of litigation seeking to recoup excessive and undisclosed fees in self-directed retirement plans, accentuated the need for action on this issue.

    There was much speculation as to who would act first to correct the problems created by this lack of disclosure, Congress or the regulators at the DOL.  While bills were being introduced in Congress, DOL officials were working to issue regulatory guidance in the form of a three-part initiative.  The first component of the DOL three-part initiative did not directly address participant disclosure in that it only modified service provider fee reporting on Schedule C to the plan’s Annual Report, Form 5500.  The second part of the initiative will require more robust disclosures by service providers directly to plan fiduciaries.  The third and final action taken by DOL in this series will require plan administrators to disclose plan and investment-related information, such as fee and expense information, to participants in self-directed plans.

    A previous Newsbrief (available at http://click.bsftransmit1.com/Preview.aspx?EmailId=118&AccountID=1253&ViewMode=HTML) discussed the rules and impact of the second component of the DOL initiative. This Newsbrief generally discusses the third component of the three-part initiative and how it will affect plan sponsors and plan fiduciaries.

    New Plan Administrator Disclosure Rules

    The last of the three-part DOL retirement plan expense disclosure initiative was a regulation (the Regulation) issued by DOL on October 14, 2010.  Section 404(a) of ERISA requires fiduciaries to discharge their responsibilities with respect to a plan in accordance with certain fiduciary duties.  Specifically, Sections 404(a)(1)(A) and (B) of ERISA together provide that fiduciaries must act with respect to a plan prudently and solely in the interest of participants and beneficiaries.  Under the umbrella of Section 404, the Regulation provides that a plan administrator of a participant-directed plan must take certain measures to ensure that participants, on a regular and periodic basis, are provided sufficient information regarding the plan, including fees and expenses, to make informed decisions regarding the management of their individual accounts. The remainder of this Newsbrief discusses the specific disclosures required by the Regulation.

    Plan administrators have the responsibility for making the disclosures discussed below, but they will not be liable for the completeness and accuracy of information disclosed if the plan administrator reasonably and in good faith relies on information received from or provided by a service provider or an investment alternative issuer. The disclosures required by the Regulation can be divided into two categories: (i) plan-related information; and (ii) investment-related information.  The disclosures generally must be made on or before the date on which a participant or beneficiary can first direct his or her investments and at least annually thereafter.  With respect to new participants, plan administrators may satisfy this requirement by providing the most recent annual disclosure and any subsequent updates.

    The Regulation will apply to plan years beginning on or after November 1, 2011 (e.g., for plans operating on a calendar fiscal year, January 1, 2012).

    A.        Plan-Related Information

    The Regulation requires disclosure of three general categories of plan-related information—(i) general operational and identification information; (ii) administrative expenses; and (iii) individual expenses.  The following information must be provided to all employees who are eligible to participate in the plan, regardless of whether they do, and beneficiaries that are authorized to direct the investment of the assets in their accounts.

    • General Operational and Identification Information: (i) explanation of how participants and beneficiaries may provide investment instructions; (ii) explanation of any plan limitations on instructions, including any restrictions on transfer to or from a designated investment alternative; (iii) description of or reference to plan provisions regarding the exercise of voting, tender and similar rights, including any restrictions on these rights; and (iv) identification of any designated investment alternatives and designated investment managers and a description of any brokerage windows, self-directed brokerage accounts, or other similar plan arrangements.
    • Administrative Expenses: (i) explanation of any fees and expenses for general plan administrative services (e.g., legal, accounting, recordkeeping) that may be charged against the individual accounts of participants and beneficiaries and are not reflected in the total annual operating expense of any designated investment alternatives as well as the basis on which these charges will be allocated (e.g., pro rata, per capita) to participant accounts; (ii) quarterly statements with regard to the amount of fees and expenses for administrative services actually charged to the individual accounts and a description of the services to which the charges relate; and (iii) if applicable, an explanation that some of the plan’s administrative expenses for the preceding quarter were paid from the total annual operating expenses of one or more of the plan’s designated investment alternatives (e.g., 12b-1 fees, revenue sharing arrangements).
    • Individual Expenses: (i) explanation of any fees and expenses that may be charged against individual accounts on an individual, rather than plan-wide, basis (e.g., fees for processing plan loans, or qualified domestic relations orders, investment advice); and (ii) quarterly statement identifying the fees and expenses actually charged to the individual accounts and a description of the services to which the charges relate.

    The disclosures must be based on the latest information available to the plan.  Participants and beneficiaries must be provided a description of any change to these disclosures at least 30 days, but not more than 90 days, in advance of the effective date of the change, unless the inability to provide advance notice is due to events that were unforeseeable or circumstances beyond the control of the plan administrator, in which case notice of the change is required to be provided as soon as reasonably practicable.

    B.        Investment-Related Information

    Plan administrators will also have to make more detailed disclosures regarding plan investment alternatives.  These disclosure requirements are intended to enable participants to make better informed decisions regarding plan investment alternatives.  Plan administrators will be required to provide the following investment-related information:

    • Identifying Information: identify the name of each designated investment alternative and the type or category of the investment (e.g., money market fund, balanced fund, large-cap stock fund, employer stock fund).
    • Performance Data: (i) for designated investment alternatives with returns that are not fixed, the average annual total return of the investment for one-, five-, and ten-year periods as of the end of previous calendar year, as well as a statement indicating that an investment’s past performance is not necessarily an indication of how the investment will perform in the future; or (ii) for designated investment alternatives with fixed returns, the fixed or stated annual rate of return and the term of the investment and, if applicable, a statement that the issuer reserves the right to adjust the fixed rate of return prospectively during the term of the agreement and how to obtain the most recent rate of return (e.g., telephone or website).
    • Benchmarks: for investment alternatives with returns that are not fixed, the name and returns of an appropriate broad-based securities market index over the one, five, and ten calendar year periods comparable to the performance data periods provided above and which is not administered by an affiliate of the investment issuer, its investment adviser, or a principal underwriter, unless the index is widely recognized and used.
    • Fee and Expense Information: for investment alternatives with returns that are not fixed, (i) the amount and a description of each shareholder-type fee (e.g., fees charged directly against a participant’s or beneficiary’s investment, such as commissions, sales loads, sales charges, deferred sales charges, redemption fees) and restrictions or limitations that may be applicable to a purchase, transfer, or withdrawal of the investment (e.g., round trip, equity wash); (ii) total annual operating expenses of the investment expressed as a percentage (e.g., expense ratio); (iii) total annual operating expenses of the investment for a one-year period expressed as a dollar amount for a $1,000 investment (assuming no returns and based on the percentage described in (ii) above); (iv) a statement indicating that fees and expenses are only one of several factors that participants and beneficiaries should consider when making investment decisions; and (v) a statement that the cumulative effect of fees and expenses can substantially reduce the growth of a participant’s or beneficiary’s retirement account and that participants and beneficiaries can visit the Employee Benefit Security Administration’s website for an example demonstrating the long-term effect of fees and expenses. For investment alternatives with returns that are fixed, the amount and a description of any shareholder-type fees and a description of any restriction or limitation that may be applicable to a purchase, transfer, or withdrawal of the investment in whole or in part.
    • Internet Website Address: an Internet website address providing participants and beneficiaries access to the following information regarding the designated investment alternative: (i) name of the alternative’s issuer; (ii) investment’s objectives or goals; (iii) investment’s principal strategies and principal risks; (iv) investment’s portfolio turnover rate; (v) investment’s performance data described above updated on at least a quarterly basis or more frequently if required by other applicable law; and (vi) investment’s fee and expense information as provided above.
    • Glossary: a general glossary of terms to assist participants and beneficiaries in understanding the designated investment alternatives, or an Internet website address that will provide access to this type of glossary along with a general explanation of the purpose of the website address.
    • Format of Disclosure: The information discussed above must be provided in a chart or similar format that is designed to facilitate a comparison of the information for each designated investment alternative available under the plan. The DOL has provided a model disclosure notice that, if tailored to a plan’s investment options, may be used to satisfy this disclosure requirement.
    • Information Provided Subsequent to Investment: Any materials provided to the plan relating to the exercise of voting, tender, and similar rights related to the investment, but only to the extent such rights are passed through to participants or beneficiaries under the plan.
    • Information Provided Upon Request: (i) copies of prospectuses; (ii) copies of any financial statements or reports to the extent such materials are provided to the plan; (iii) statement of the value of a share or unit of each designated investment alternative as well as the date of the valuation; and (iv) a list of the assets comprising the portfolio of each designated investment alternative that constitute plan assets and the value of each asset.
    • Employer Stock: Many of the disclosure rules discussed above do not apply to employer stock funds. The Regulation contains special rules for employer stock funds.


    The aims of this transparency initiative are to help participants make better investment decisions and to help lower the overall cost of administering a 401(k)-type plan, thereby allowing plan sponsors and fiduciaries to provide a more effective plan structure.  The Regulation, however, creates a significant amount of new disclosure requirements for plan sponsors.  Some have suggested that more disclosure will actually lead to higher plan costs because of the additional recordkeeping that will be required of plan administrators.

    Although the Regulation is final, it is still possible that Congress could consider fee disclosure legislation in the future.  In any case, for now, plan administrators of calendar year plans must prepare to comply with the new rules as soon as January 1, 2012.