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New Requirements for Defined Contribution Plan Fee Disclosures
By Tim Pitney
Recent changes will now require that you analyze and disclose fees like never before. On October 14, 2010, the U.S. Department of Labor (DOL) issued final a final rule known as “Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans”. The rule now requires fiduciaries to disclose Defined Contribution Plan fees to participants and is certain to raise questions among participants and regulators about how reasonable fees are.
Additionally, last July, the DOL released interim final regulations outlining the requirements that service providers must follow to disclose fees to plan fiduciaries. The rules were issued on July 15, 2010, and take effect on July 16, 2011. In the past, the primary plan fiduciaries were responsible to determine the arrangement between a plan and a service provider was reasonable. Now, the DOL has stepped in with the intention to provide a framework by which providers can disclose information to regulators and participants as well as ensure that written agreements are in place.
Highlights of the new participant disclosure rules include:
- The new rule goes into effect for plan years ending after November 1, 2011– much sooner than expected
- Fee disclosure affects plans of all sizes, not just those with more than 100 participants
- Investment and administration expenses must be included
- Fees must be disclosed quarterly
- Investment returns must be compared to a broad-based index
Why the focus on fees? In the wake of a decade which presented two historical bear markets, a wave of baby boomers looking to retire with not enough saved and increasing pressures on Social security, the government wants to ensure that retirement plans are being managed prudently and fiduciaries are properly discharging their duties.
Recent fee litigation against certain company retirement plans (e.g. Bechtel, Walmart) also applied some pressure. In the Wal-Mart case, an employee filed the suit in US District Court for the Western District of Missouri, stating that Wal-Mart violated mutual fund ERISA statutes and cost its Defined Contribution employee plan holders and investors $60 million in unnecessary expenditures by purchasing expensive mutual funds, when cheaper alternatives were available. The Bechtel case was a similar situation and was recently settled for $18.5 million.
Plan sponsors looking to mitigate fiduciary risk should consider taking a consultative approach to understanding the goals of their company and employees in order to maximize the benefits of the retirement program to both. If you are questioning any of your own due diligence, you should look to utilize the services of an Independent Advisor who can help consult on your fiduciary requirements.
Sapers & Wallack provides retirement plan sponsors with comprehensive, independent fiduciary consulting. Using tools such as an Investment Policy Statement and rigorous investment and fee analytics, we sign onto your plan as a fiduciary and help you manage, monitor and maintain your plan. In addition, annual or semi-annual fund reviews provide documentation for meeting your fiduciary responsibilities with respect to fund monitoring and replacement. We also meet with plan participants and provide them with executable investment advice relating to their asset allocation.
Tim Pitney is Vice President of Investment Advisory at Sapers & Wallack, Inc. and is responsible for managing the three business units that comprise the Investment Advisory services: Qualified Retirement Plan Advisory, Wealth Management and Financial Planning. Tim offers securities and investment advisory services through NFP Securities, Inc. a Broker/Dealer and Member FINRA/SIPC and can be reached at tpitney@swadvisors.com or (617) 225-2600. NFP Securities, Inc. is not affiliated with Sapers & Wallack.