Transparency and fee disclosure were front and center with retirement plan sponsors in 2011. The U.S. Department of Labor (DOL) recently gave sponsors and their plan providers a short stay from requirements to furnish more information about plan fees and expenses.
For calendar-year plans, the latest date for furnishing participants and beneficiaries with their first set of initial fee disclosures (all disclosures other than those required at least quarterly) has been extended to May 31. Initial service provider fee disclosures must be provided to plan fiduciaries no later than April 1.
What to expect from service providers
An interim final regulation issued by the DOL in July 2010 requires defined contribution and defined benefit plan service providers (e.g., recordkeepers, financial advisors, and investment managers) to disclose all direct and indirect compensation.
Plan sponsors have a duty under federal pension law (ERISA Section 408(b)(2)) to make sure any arrangements they enter into with service providers are reasonable. If they aren’t, the arrangement could be deemed a prohibited transaction and harsh penalties may result.
Preparing participant for fee disclosure
The DOL extension of the required date for providing plan participants with initial fee disclosure gives you (or your service provider if they are preparing this for you) some additional time to prepare participants for the disclosure. Many plan participants think their retirement plan is a free benefit. An AARP survey of 401(k) participants found that 71 percent of the respondents said they pay no fees in association with their plan. When these employees begin receiving the DOL – required information about their plan’s fees and expenses, they may believe that their employers are making them pay charges they didn’t previously have to pay.
When you begin furnishing required disclosures, you may want to stress that the fees you’re reporting are not new fees. You are simply giving employees added value by providing them with more detailed information than you previously did.
The following checklists can help you prepare for participant and service provider fee disclosure. Make sure you understand the plan’s sponsor and participant fee disclosure regulations. Determine and document current administrative and investment management fees.
- Inform participants and beneficiaries about fees in general in advance of the required disclosure.
- Work with your service provider to develop a strategy for communicating fee information.
- Provide participants and beneficiaries with both in-house and service-provider contacts for any questions they may have once they receive the disclosures.
- Review the disclosure statement annually.
Service provider disclosure:
- Ask your advisor to provide periodic benchmarking studies to determine whether your plan’s fees continue to be reasonable.
- Document all investment decisions.
- Compare the 408(b)(2) disclosure to the information reported on your 5500 Schedule C.
- Continuously monitor plan fees.
- Ask you advisor to conduct an RFP for recordkeeping services every three to five years.
As a plan sponsor you may want to consider implementing the following:
- Implement an Investment Policy Statement and review it at least annually.
- Document the rationale for adding or removing funds from the investment menu.
- Review the fees associated with the plan.
- What are the expenses and how are they paid?
- How do the fees compare with those of other plans of similar size?
Since there are numerous aspects and deadlines to be aware of, understanding and complying with the transparency and fee disclosure regulations is crucial to fulfilling your fiduciary responsibilities. It may be prudent to seek the help of a retirement plan advisor to assist in your efforts to comply. You may also find it useful to develop an ongoing relationship with such a qualified plan consultant as they can also assist in ongoing review and monitoring of investments, benchmarking your plan’s services and costs and providing education to your employees.