Background on the DOL’s Fee Disclosure Initiative on Fees Paid From The Plan
The Department of Labor has focused over the last several years on implementing new rules to enhance transparency of fees charged both to plans and their participants. These rules were essentially rolled out under three separate initiatives.
1) Disclosure to agencies:
Applicable to all retirement plans subject to ERISA.
The first requirement was implemented on the 2009 Form 5500 series filings.
The level of detailed reporting required with regard to the dollar amounts and to whom the fees were paid is dependent on the type of Form 5500 filed.
On a plan with less than 100 participants, reporting is limited to the aggregate dollar amount of administrative and investment-related fees paid or payable.
On a large plan (generally more than 100 participants), Schedule C to the Form 5500 must be completed to report persons who rendered services to or who had transactions with the plan during the reporting year if the person received, directly or indirectly, $5,000 or more in reportable compensation in connection with services rendered. Details required include the name and tax identification number or address of the recipient, as well as identification of the specific services provided (i.e. actuarial, legal, and administrative fees as well as commissions and revenue sharing arrangements.)
2) Disclosure to plan fiduciaries (29 CRF 2550.408b-2):
Applicable to all retirement plans subject to ERISA.
Deadline for compliance July 1, 2012.
Each of your service providers (i.e. third party administrator, custodian/recordkeeper, investment manager, etc) must provide you with detailed information regarding their fees and how they are charged to the plan and to the participants.
In the event that the plan is paying all or a portion of these fees, the fiduciaries must understand and evaluate the “reasonableness” of the fees. This is essential to the fiduciary obligation to pay only those fees from the plan which are “reasonable” with respect to the level of service provided, benefit received, similar alternatives available, etc.
The payment of fees (from the plan) that are not “reasonable” constitute a “prohibited transaction”. It is essential that the plan fiduciaries act in a prudent manner, and the evaluation of fees is a factor in that prudence.
The plan Fiduciaries should take care to document the decision process taken in evaluating, initiating and maintaining the plan’s investment arrangement and, if offered, designated investment alternatives. The DOL provides this template to prompt you with the relevant areas for evaluation.
3) Disclosure to plan participants (29 CFR 2550.404a-5):
Applicable to all retirement plans subject to ERISA, but only those with participant-directed accounts.
In order for plan participants to make educated decisions regarding the investment of their plan accounts, the DOL believes they need to have further information regarding the investment options offered, as well as the fees associated with those options. Certain annual and quarterly disclosures will be required beginning in 2012.
Annual Plan-Related Information
(Applicable to all participant directed plans):
- An explanation of the investment arrangement offered (i.e. the portions of the plan the participant is tasked with investing, identification of the investment options permitted, how the participant can access the account to make changes to the investments, etc.).
- Identification of any investment manager.
- Identification of any brokerage window, self-directed brokerage account or similar arrangement.
- Identification of certain administrative fees that may be charged.
Investment-Related Information (anticipated to be provided by the plan’s custodian/recordkeeper)
(Applicable annually and only to plans offering a set of designated investment alternatives, other than the last bullet point below)
- Identifying information on each offering.
- Historical performance on the rate of return (and certain other information on fixed or stated investments such as the rate of return and term) via a comparative chart, a model of which is included in the regulations.
- Objectives and goals, benchmark comparisons.
- Fee and expense information.
- Internet website address.
- Glossary of terms.
- Annuity option, if applicable.
- Identification of administrative fees that were actually charged. (Must be disclosed quarterly and also applies to self- directed brokerage accounts.)
Annual Disclosure– Must be provided to all Eligible Employees on or before the date a participant can first direct his/her investments, and “annually” thereafter. “Annually” thereafter means at least once in any 14-month period (For more information, see DOL Announces a More Flexible Annual Fee Disclosure Deadline). Any changes made to the information contained in the disclosure must be provided no less than 30-days and no more than 90-days before the effective date of the change.
Quarterly Disclosure–Must be provided at least once in each 3-month period, regardless of whether the plan operates on a calendar or fiscal year. A plan that provides the statement no later than 45 days after the end of a quarter will be deemed to have satisfied the requirement to provide the disclosure quarterly. Any changes made to the information contained in the disclosure must be provided no less than 30-days and no more than 90-days before the effective date of the change.
Disclosures must be provided to:
- All Eligible Employees, regardless of whether the individual currently contributes to the plan or maintains a plan balance.
- Terminated and retired employees maintaining a balance in the plan.
- Beneficiaries of deceased participants maintaining a balance in the plan.
- Alternate payees (awarded balances under a Qualified Domestic Relations Order).
The deadlines for providing the initial disclosures are based upon the first day of the plan year.
|Play Year Beginning
|Initial Annual Disclosure
|Initial Quarterly Disclosure
|11/1/2011 – 7/1/2012
A designated investment alternative is any investment alternative the plan designates into which participants may direct the investment of their individual account assets. For example, if the plan designates 10 identified mutual funds into which participants may direct their investments, each of the 10 funds is a designed investment alternative. The term does not include a brokerage window, a self-directed brokerage account or similar arrangements permitting participants to select investments beyond the designated investment alternatives.
A plan with a brokerage account option is not exempt from either of the disclosure requirements. The plan administrator therefore would have to disclose the fees and expenses the plan would charge. The plan administrator would not have to disclose charges that may arise from the operation of the brokerage account (e.g. brokerage or other charges relating to the participant’s election of investments which are not designated investment alternatives).
- Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans
- DOL Fact Sheet Final Rule to Improve Transparency of Fees and Expenses to Workers in 401(k)-Type Retirement Plans
- DOL Model Chart for Investment-Related Information
- Interim Policy on Electronic Disclosure Method of Delivery
- 401(k) Plan Topics (with some additional useful tools and publications to help you understand plan fees)