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January 19 2012

401(k) Fee Disclosures and Related Fiduciary Issues

By: Timothy J. Tornga

Updated February 22, 2012

The most important issue for 401(k) plan sponsors in 2012 will be responding to the new participant-level fee disclosure regulations. Plan sponsors have a fiduciary duty to make sure that fees paid from plan assets are reasonable. But historically this information has been presented in a dizzying array of sometimes inconsistent information. How does a plan sponsor sort through this information when choosing an investment fund line-up and how do participants evaluate this information when making their individual investment decisions?

The most common form of retirement plan is now the 401(k) plan. Other types of plans, such as a 403(b) plan, have similar features and their plan sponsors have similar responsibilities. A common characteristic of these plans is that participants are given the opportunity to allocate their accounts among selected mutual funds in a manner that suits their risk tolerance and their expertise. We call these participant directed account plans.

These new regulations issued by the Department of Labor (DOL) will standardize information reporting and mandate disclosure to participants in plans regulated by ERISA. This will add a burden to plan sponsors. But these regulations should provide plan sponsors the information they need to compare service provider options. This disclosure should provide participants additional information with which to compare fees and performance of plan choices. Some of the information behind this new regulation and related regulations and proposals tends to confuse. Here is some background.

ERISA Section 404(c). This provision was included in ERISA when adopted in 1974. Final regulations were published in 1992 describing the investment option information that must be given to participants if the employer wanted to shift responsibility for the consequences of participant investment choices onto the plan participants. This was good for employers since it gave them a template to limit their risk in offering a plan and allowing employee participation and investment choice. This also benefited participants by giving them timely information.

Form 5500 Schedule C Service Provider Compensation. Several years ago, Form 5500 was modified to require disclosure of service provider compensation. Service providers include third party administrators, accountants, lawyers and others. This is aggregate information not participant-specific information and the information gathering is difficult and the result is sometimes inconsistent.

Service Provider Fee Disclosure Regulations Under ERISA Section 408(b)(2). This regulation places the burden for disclosure of service provider expenses on the service providers themselves. The purpose of this regulation is to enable plan sponsors to determine whether a service provider arrangement is reasonable and avoid breaches of fiduciary duty. This information will enable plan sponsors to accurately complete their Forms 5500 and to accurately complete the participant-level fee disclosure reports. The effective date of these regulations has been delayed until July 1, 2012.

Amended Definition of “Fiduciary.” This regulation has been bouncing around for some time and will be re-proposed in 2012. The regulation would broaden the scope of parties who may be considered a fiduciary. However, the service provider fee disclosure and participant-level fee disclosure regulations will become effective independent of the completion of the amended fiduciary definition.

Investment Advice Regulations. It is not enough to have the tools to save for retirement (access to a 401(k) plan). Participants also need instruction and information to use the tool. Plan sponsors and others have been reluctant to give advice for fear of becoming responsible for the results. Several earlier versions of investment advice regulations have been adopted in the past. The most recent version became effective December 27, 2011. By following these rules, those giving investment advice can minimize or eliminate liability for participant choices. The regulations permit the giving of advice under two models-the equal fee model and the neutral computer advice model. These two models are explained in the final investment advice regulations at 76 FR 66136 (290 KB, PDF) at page 66163.

Participant-Level Fee Disclosure Requirements

The regulation of greatest importance to 401(k) plan sponsors are the participant fee disclosure regulations under ERISA Section 404(c). Under these regulations, plan sponsors must supply participants with investment-related information including fees and expenses and also the historical performance of the investment options. These must be provided in somewhat standardized, comparative charts and must also recite market benchmarks. An example of how this information can be displayed in tabular form is contained in the final regulations at 75 FR 64910 (906 KB, PDF) at page 64942.

The participant fee information must be provided in two types of disclosures. The first is an annual disclosure and the second is a quarterly disclosure. The initial disclosure of plan and investment information must be provided not later than August 30, 2012. The first quarterly expense statement is due not later than November 14, 2012 for the third quarter of 2012.* This time table is somewhat different for plans operating on a fiscal year. All plan sponsors must ask themselves how they are going to satisfy the fee disclosure regulations. The various TPAs, brokers, and mutual funds that help plan sponsors select the investments offered should be able to assemble this information. But it is ultimately the plan sponsor’s responsibility to make sure that the information is accurate, that it is assembled in a correct manner, that it is distributed to participants in the correct manner and distributed on a timely basis.

With these new disclosure requirements, plan participants will be able to better evaluate how their accounts are being invested and choose funds that are best suited to their goals. Plan sponsors will have a somewhat uniform platform to give their participants this much-needed information and will be able to use this information in a meaningful way when they compare fees and performance to other products on the market.

This information may also be misused. There may be a tendency to focus on fees only or to chase the hottest performing fund. Low fees and high performance are good, but must be balanced with one another and with good service. Plan sponsors and plan participants will soon be able to see some of the important characteristics of their retirement plans presented in a consistent manner and more understandable form.

Unless you are already confident that this information will be ready as required, we recommend that you promptly contact your TPA, broker or other advisors and have a detailed discussion about how this requirement will be satisfied. If you have any questions, we at Mika Meyers will be happy to help you answer them and to assist you in developing the necessary disclosure package and provide instruction to you on timely and with timely and appropriate delivery methods.

*A January 4, 2012 news article** reported that the DOL is considering further delay of the required date of the first such fee disclosures. This information comes from discussions by unnamed outsiders with unnamed DOL representatives. This news should not cause you to delay your preparation for these disclosures. The disclosures are inevitable and delay, if any, is likely to be short.

***The final regulation on service provider fees delayed the service provider disclosures from April 1, 2012 to July 1, 2012 and delayed the initial disclosure of plan and investment information from May 31, 2012 to August 30, 2012 and delayed the first quarterly expense statement from August 14, 2012 to November 14, 2012.

Related Newsletters
"401(k) Fee Disclosures and Related Fiduciary Issues," 1/20/2012