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Department of Labor Fee Disclosure Overview
By Tim Pitney
Are you a plan sponsor or fiduciary to an ERISA covered retirement plan? Do you know how much you are paying for the plan? Do you know how much your participants are paying for the plan? Effective April 1st, 2012*, you are required to know the answers to these questions, and disclose this information to plan participants and eligible employees. If you have not taken the necessary steps to prepare for the NEW FEE DISCLOSURE REGULATIONS, please contact Sapers & Wallack Inc. at (617) 225-2600.
*Note: recent industry reports, including Reuters’ January 4, 2012 article “Labor Department May Delay 401(k) Fee Disclosure”, are predicting this timeline will be extended. However, the facts and circumstances of what plan sponsors need to do to comply are not intended to change.
Over the past 5 years the U.S. Department of Labor and the Employee Benefits Security Administration have been constructing new regulations to increase transparency in the retirement plan industry. Beginning on April 1, 2012, new rules from the U.S. DOL require 401(k), 403(b), 457, Employee Stock Option, and Profit Sharing plan sponsors to use an easily understandable format to disclose all fees for plans and investments in the plans. The regulations are broken into two pieces to assist plan sponsors in providing employees with the necessary information. The two parts are:
What is Fee Disclosure
408(b)2: Requires all plan providers, investment advisors, third party administrators, and other service providers to disclose fees and services to plan sponsors. Service providers must disclose the following:
- A list of all services provided to the plan and/or plan sponsors
- All compensation received directly from the plan, as well as indirect compensation received from third parties
- The providers fiduciary standing in regards to the plan
404(a)5: Requires plan sponsors to disclose plan related information to all eligible employees and current participants of the plan. Plan sponsors must disclose the following:
- 1, 3, 5, and 10 year performance data for all investment alternatives offered in the plan
- Broad based benchmarks to compare performance of the investment alternatives
- Total annual operating expenses, on a per participant basis, for both the investment alternatives and the plan as a whole; this figure can be shown in both hard dollar amounts and as a percentage of assets
- Glossary of relevant terms and necessary definitions
- A link to a website where employees can further research the available investment alternatives
Purpose of Fee Disclosure
In an increasingly complex world of investing, the average investor is at a disadvantage. With the implementation of these new regulations, the U.S. Department of Labor is hoping to give plan participants a better chance at successfully saving for retirement. The two regulations noted above will help to increase overall transparency in an industry that has been clouded by confusion for years. With service providers being upfront about services and fees, plan sponsors will have an easier time demonstrating that they are paying reasonable fees for necessary services. Plan participants, in turn, will be able to accurately evaluate the cost of participating in the plan, as well as the benefit returned through investment performance.
How to Prepare
On April 1st, 2012, the new regulations become effective, the first set of disclosures must go out to plan participants, and eligible employees within 60 days of the effective date. The first step is to conduct a full plan review, either internally or by using a consultant or adviser who is completely independent and is thus free of conflicts of interest. Sapers & Wallack Inc. is here to help! We can help you understand the various levels of compensation hidden within retirement plans, and help you prepare a process to track plan expenses and relay the necessary information to participants, and eligible employees.
If the topic of fee disclosure is new to you, please contact Tim Pitney @ Sapers & Wallack Inc. at your earliest convenience (617) 225-2600.