Effective Date of DOL's Fee Disclosure Regulations Is Near -- Plan Sponsors Should Not Procrastinate
The increase in recent years of participant-directed individual account plans, such as 401(k) plans, that allow participants to direct the investment of all or a portion of the assets held in their individual plan accounts, has led to concerns that participants are not getting enough information to make informed decisions. In response to these and other concerns, the Department of Labor (DOL) issued two sets of regulations: (1) participant fee disclosure requirements and (2) service provider (e.g., record keepers, investment advisors, brokers, etc.) fee disclosure requirements, specifying in detail the types of fee, expense, and other investment-related information that should be provided to participants (from plan sponsors) and to plan fiduciaries (from service providers).
Participant Fee Disclosure
The participant fee disclosure regulations are designed to ensure participants are made aware of investment related information and administrative and individual expense information.
It is the responsibility of the plan sponsor to obtain this information, much from its service providers, and distribute it to participants, unless other contractual arrangements with service providers have been made. This is new for plan sponsors, therefore it is imperative that plan sponsors understand this new disclosure requirement and obtain information needed from service providers.
The regulations are very detailed and provide specific timing for certain disclosures that plan sponsors will need to review carefully in order to fully comply. There are steps at the end of this article to help begin this process.
Service Provider Fee Disclosure
The service provider fee regulations set forth disclosure rules that require service providers to pension benefit plans to disclose information to help plan fiduciaries assess the reasonableness of service contracts or arrangements, including the circumstances that may affect service providers' performance, and help fiduciaries better understand what service providers are paid for the services they provide. It is crucial that plan sponsors carefully examine the data they are provided, including auditing the data, if needed, to ensure accuracy.
The plan sponsor also has a fiduciary duty to determine whether the fees disclosed are reasonable for the work performed. Paying no more than reasonable compensation is critical to avoiding a prohibited transaction. Due to this increased transparency in fee disclosures, this determination may be more important than ever before. Participants may begin to challenge whether reasonable compensation has been paid to service providers even more than they have in the past. The challenges may even result in increased litigation against the plan sponsor. Therefore, plan sponsors should create a detailed review process of service provider compensation.
Although the effective date for both the participant and service provider fee disclosure regulations has been delayed (the initial disclosure notices to participants and beneficiaries are not due for calendar year plans until Aug. 30, 2012, and the service provider disclosures are not due until July 1, 2012), it is important for plan sponsors to become familiar
with the regulations and begin taking steps
toward satisfying the disclosure requirements. These new
requirements will take time for all parties to build processes to comply with the disclosure requirements. Read our summary
of the items required to be disclosed pursuant to the participant and service provider fee disclosure regulations.
Below is a diagram which helps explain the relationship between the participant fee disclosure regulations and the service provider fee disclosure regulations. Again, the most vital component of this new process is for the plan sponsor to accumulate the proper information in a timely manner.
Next Steps—Participant Fee Disclosures
Plan sponsors should focus on the participant fee disclosure regulations to fully understand what they will ultimately have to provide to participants. Here are a few steps that can be taken to get started.
Learn about the regulatory requirement to provide data to participants.
Inventory participant data currently available or that must be obtained, including making a list of all responsible parties who currently maintain the various types of data that will be needed.
Think about how the information will be provided (e.g., will it be included in a summary plan description, as part of a pension benefit statement, using the model comparative chart provided in the regulations, or through another method, depending on the information being provided).
Start contacting Plan service providers (record keepers, investment advisors, brokers, etc.) and/or issuers of designated investment alternatives to obtain the applicable information required to be disclosed and coordinate efforts with these entities with respect to the participant fee disclosure requirements. It is important to determine what information can/will be provided by the different service providers.
Establish policies and procedures to ensure the required information is disclosed to participants and beneficiaries on a timely basis (automatically, annually, quarterly or upon request, as applicable) consistent with the participant fee disclosure requirements and ensure that information regarding any changes to the investment-related information is disclosed within the designated timeframe.
Review service contracts or arrangements and work with service providers to ensure responsibilities have been properly delegated and memorialized in a binding contract to: (1) ensure compliance with the participant fee disclosure rules and (2) provide protection to the plan sponsor in the event proper disclosure is not timely made—as it is ultimately the plan sponsor's compliance requirement.
Next Steps—Service Provider Fee Disclosures
Plan sponsors should ensure that service providers are complying with their regulatory disclosure requirements. The steps to follow are (in some respects) similar to the participant fee disclosure steps above.
Review the service provider fee disclosure requirements carefully.
Ask the service provider how they plan to comply with the regulations – also request sample disclosures.
Discuss the timing of the service provider's disclosures.
Ensure reasonableness of contracts with providers, including compensation to the providers.
Review services contracts with service providers to ensure they will comply with such requirements.
Posted: Jan. 26, 2012
Updated: Feb. 17, 2012 (for effective dates only)
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.