Now that the Department of Labor has released final regulations regarding required plan fee disclosures, plan administrators can expect assistance from service providers in preparing the required fee disclosures to plan participants.
The final regulations under ERISA 408(b)(2) for retirement plan fee disclosures have been updated so that there is greater alignment between the disclosures that service providers make to the plan and what the plan must disclose to its participants. In addition, the 2012 plan disclosure compliance deadlines have been extended for a few more months. Plan service providers must now disclose certain information regarding their fees, services, and fiduciary status to plan fiduciaries by July 1, 2012 (instead of April 1, 2012), and plan fiduciaries must make the required initial fee disclosures to participants by August 30, 2012 (instead of May 31, 2012). (Please see the accompanying advisory for more information regarding participant-level fee disclosures and our prior advisory for information regarding previous extensions of these deadlines.)
Alignment Between Service Provider and Participant Disclosures
The final rule requires plan service providers to describe all services performed for the plan and disclose to plan fiduciaries all compensation to be received for those services, including amounts paid directly by the plan or plan sponsor, as well as payments received indirectly from other sources. This information will assist plan fiduciaries in fulfilling their duties to assess the reasonableness of service-provider compensation and identify potential conflicts of interest.
The final regulations also update the disclosure requirements for service providers to better track the information that plan administrators need to comply with the participant fee disclosure requirements. A plan service provider must now disclose to plan fiduciaries the total annual operating expense of each designated investment alternative, expressed as a percentage. In addition, the service provider must disclose any other investment-related information that must be disclosed to participants on the comparative chart of investment options if such information is within the control of, or reasonably available to, the service provider. This could include, for example, historical rate of return data.
Any changes to the required disclosures must be generally disclosed by the service provider to the plan within 60 days, except that changes to investment-related information need be disclosed only annually.
Exemption for “Frozen” 403(b) Contracts
The DOL guidance provides welcome relief for 403(b) plans because it clarifies that “frozen” investment funds in 403(b) plans that are exempt from the IRS Form 5500 annual reporting requirements are also exempt from the service provider fee disclosure requirement. Disclosure of service provider fees is not required with respect to a 403(b) plan annuity contract or account that meets the following criteria:
- The contract or account was issued before Jan. 1, 2009;
- The employer has not had an obligation to make contributions, nor has it made any contributions, to the contract or account on or after Jan. 1, 2009;
- The rights and benefits of the contract or account are legally enforceable against the insurer or custodian by the participant without any involvement by the employer; and
- The participant is fully vested in the contract or account.
This exemption was made available because employers often do not have dealings with the service providers of frozen contracts and accounts and would be unable to obtain the information required for service provider fee disclosures. Sponsors of 403(b) plans with frozen accounts or contracts should confirm that they are not involved with the processes of management or distribution of funds, including the approval of any loans, from these accounts or contracts in order to preserve this exemption.
Further Guidance Expected on Summary of Service Provider Fees
Heeding many commenters’ requests, the final rule includes a model chart that summarizes all of the required service provider fee disclosures in one place. Although use of this model summary is currently not required, the DOL indicated that it intends to issue further guidance on the tools that service providers may be required to furnish to plan fiduciaries to assist in their review of fees and other disclosures by plan service providers.
Plan sponsors should contact their service providers to ensure that they will comply with this new DOL guidance and continue to work with their plan’s third-party administrator or recordkeeper to prepare and coordinate the required fee disclosures to participants. In fact, since compliance with these rules is needed to avoid a prohibited transaction, plan administrators have a duty to follow up if they do not receive the information from their service providers and must terminate the relationship with any service provider who does not provide the requested information. Please contact us if you have any questions regarding these new fee disclosure requirements.