- Final Deadline for 401(k) Fee Disclosures: August 30, 2012
- June 15, 2012
- Law Firm: Kaufman Canoles A Professional Corporation - Norfolk Office
The Department of Labor postponed the date that 401(k) plan sponsors must comply with new fee disclosure rules from May 31, 2012 to August 30, 2012. These rules, introduced in final regulations under the Employee Retirement Income Security Act (“ERISA”) Section 408(b)(2), require sponsors of participant-directed account plans such as 401(k) plans to provide detailed information about the plan’s procedures for making investment directions as well as a breakdown of the fees charged by each available investment fund.
The postponement was granted by the Department of Labor in order to allow plan sponsors some additional time to adjust to recent revisions to the final regulations. The three-month delay granted by the Department of Labor leaves little time for plan sponsors to finalize their disclosure materials to comply with the new fee disclosure requirements.
What Plan Sponsors Need to Know
Sponsors of 401(k) plans, 403(b) plans, and other plans that permit individual investment direction, should be aware that several new categories of information relating to plan investments and fees will now need to be disclosed for the first time. If not already received, plan sponsors should begin to receive detailed fee disclosure information from the plan’s investment providers. This information must be compiled into two separate disclosure statements that are required to be provided to participants on an ongoing basis: an annual disclosure (which must be provided by August 30, 2012), and a quarterly disclosure (the first installment of which must be provided by November 14, 2012).
Service Provider Fee Disclosures
The first step toward compliance with the new fee disclosure rules is to obtain information on fees paid to all plan service providers. The new regulations require service providers to provide plan sponsors with detailed information on the services provided to the plan and the total fees paid by the plan, the plan sponsor, or an affiliate thereof. Plan sponsors are responsible for specifically requesting fee information from service providers who fail to provide this information without prompting. Covered service providers include third-party administrators, trustees, investment advisors, accountants, lawyers, consultants, and other similar service providers.
The annual disclosure must be provided to participants before they enroll in the plan and at least annually thereafter. This notice will include general plan-related information and plan investment information.
General plan-related information will fall into three categories. First, the annual notice must include "general plan information" about the structure and mechanics of the plan, such as an explanation of how to give investment instruction, a list of the plan’s investment options, and a description of any arrangement that enables the selection of investments beyond the plan’s designated investments. Second, the notice must describe "administrative expenses information," which are fees and expenses for general plan administrative services that may be deducted from individual accounts, such as recordkeeping services fees. Third, "individual expenses information" must be included in the annual notice, which are fees and expenses that may be charged to or deducted from the individual account of the participant or beneficiary, based on the actions taken by that participant or beneficiary, such as plan loan fees if applicable.
Plan investment information will provide the core information about each investment option available under the plan, and will include:
- For each investment option that does not have a fixed rate of return, such as a mutual fund, the following: specific information on the historical investment performance for one, five and ten-year return periods, the name and returns of an appropriate market-index over the same time periods for comparison, the total annual operating expenses expressed as both a percentage of assets and as a dollar amount for each $1,000 invested, and any shareholder-type fees or restrictions on the participant’s ability to purchase or withdraw from the investment.
- For investment options with fixed or stated rates of return: the annual rate of return, the term of the investment, and any shareholder-type fees or restrictions on the participant’s ability to purchase or withdraw from the investment.
- An internet website address that provides participants and beneficiaries access to additional information about the investment options.
- A general glossary of terms to assist participants and beneficiaries in understanding the plan’s investment options, or an internet website address that provides access to such a glossary.
For the first two items above, the information must be furnished in a chart, or format similar to that provided in the October 2010 rule, so participants and beneficiaries can compare each investment option available under the plan.
Quarterly Fee Disclosure
On a quarterly basis, participants must be provided statements showing the dollar amount of the plan-related fees and expenses (whether administrative or individual) actually deducted from their individual accounts, in addition to a description of the services for which the fee was charged. These disclosures may be included in the quarterly account balance statements otherwise required by Section 105 of ERISA.
Plan sponsors should plan accordingly as a good deal of effort may be required to produce the first round of disclosures. With administration of 401(k) plans typically outsourced to third-party recordkeepers, plan administrators are advised to ensure that their third-party recordkeeper will prepare these new notices on behalf of the plan, and should review the notices to make sure that they meet all legal requirements. Additionally, the services agreement with the recordkeeper should ideally include indemnification if the recordkeeper fails to comply with the notice requirements. In addition, plan administrators should ensure that they have purchased an appropriate amount of fiduciary liability insurance to protect the administrator in the event of a problem.