Published in the Portsmouth Herald:
Two new retirement plan disclosure regulations effective early in 2012 will bring significant change to the retirement plan landscape. No later than May 31, 2012, retirement plan participants must be told something they never knew before, how much they pay each quarter for their 401(k) plan. A companion regulation is effective April 1, 2012 that requires retirement plan service providers to disclose fee information to employers and plan fiduciaries. Understanding and complying with these rules is critical for employers who are responsible for ensuring that retirement plan fees and expenses are reasonable. After receiving this information for the first time, employees are likely to ask questions of their employers and scrutinize the fees charged to them for services many employees believed were free.
The Employee Retirement Income Security Act of 1974 (“ERISA”) requires employers and fiduciaries associated with 401(k) and other types of retirement plans to act solely in the interests of plan participants. Fiduciaries must act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting as a fiduciary and familiar with retirement plan matters would use to manage a retirement plan. As a result, fiduciaries must make a careful inquiry into the merits of any investment offered including consideration of all fees and expenses paid from plan assets because generally the higher the fees and expenses, the lower the return for participants' plan accounts. In order to assist fiduciaries and because of the perceived lack of lack of fee transparency of the financial services industry especially in bundled arrangements in which administrative costs were not made explicit, the United States Department of Labor issued disclosure regulations under Section 408(b)(2) of ERISA. As would be expected, the idea of fully disclosing fees, expenses and conflicts of interest met with considerable opposition from industry groups. Nevertheless, the new 408(b)(2) regulations require plan service providers to disclose comprehensive information to employers about the compensation they receive both directly and indirectly as well as whether services are being provided as an ERISA fiduciary. Service providers required to make disclosures include
providers of banking, consulting, custodial, insurance, investment advisory or management, recordkeeping, securities brokerage, or third party administration services; or providers who receive indirect compensation for accounting, actuarial, appraisal, auditing, legal, or valuation services.
As a result of the new 408(b)(2) regulations, some service contracts will need to be modified or adopted to comply with the regulations. Extensive disclosures are now required before an employer enters into a contract with a service provider and any extension or renewal of the contract. Employers and Plan fiduciaries will need to carefully review the disclosures to verify that their plans are paying reasonable compensation for the services received.
In addition to the disclosure regulations to employers and fiduciaries, the DOL adopted a participant fee disclosure regulation under Section 404(a)(5) of ERISA that requires regular and periodic disclosures to plan participants by employers. No later than May 31, 2012, plan participants must be provided with: a) general plan information, including the investment options and how to provide investment direction; b) investment option fee and expense information, past performance data, comparable benchmark returns, and a web site address; c) a description of fees and expenses charged to participants and beneficiaries for plan administrative services, such as legal, accounting, and recordkeeping charges, as well as how these charges will be allocated to their individual accounts; d) a description of fees and expenses charged to a specific participant’s account based on actions taken by that participant, such as charges for processing loans or investment advice; and e) the amount charged to the participant’s account during the preceding quarter for specified administrative expenses. Most retirement plan service providers have been working for months preparing to assist employers comply with the 404(a)(5) disclosure rules.
The regulations require disclosures to be made in a uniform format that is designed to help participants compare each plan’s investment options. Although some of this information is currently available to participants, information on fees charged to individual participants is not normally provided. As the required disclosures will not be simple for all employees to understand, employers should be prepared for employees to request assistance in understanding the information. More importantly, employers will need to be prepared to justify and explain the fees and expenses that must be disclosed on a comprehensive basis for the first time.
John E. Rich, Jr. is a Director at McLane, Graf, Raulerson & Middleton, Professional Association who specializes in employee benefits, pension, ERISA and tax-related matters. He can be contacted directly at (603) 628-1438, or by email at [email protected]. The McLane Law Firm is the largest full-service law firm in the state of New Hampshire, with offices in Concord, Manchester and Portsmouth as well as Woburn, Massachusetts.