Fee Disclosures: What Must Plan Sponsors Do?

Plan Administrators who are appointed to engage service providers must understand that they bear the final responsibility for making sure that vendors who are providing covered services to the plan are properly and timely disclosing required information to the employer and to the plan participants.

The retirement world has been buzzing for months because of new Department of Labor (DOL) rules regarding disclosures that must be given by service providers to plan fiduciaries and by plan administrators to plan participants.  On February 2, 2012, the DOL issued final regulations that extended the due date of the disclosures.  Much of the responsibility for compliance with these new regulations will rest on the service providers who are required to timely disclose detailed information about their compensation, fees and covered services in a specific format.  In response to the new rules, there have been many articles published and many industry seminars targeted at helping service providers understand the new disclosure obligations.


Ultimately, however, ERISA charges plan fiduciaries with the obligation to make sure that the service provider’s contract is reasonable, the services are necessary for the operation of the plan, and that only reasonable compensation is paid from the plan.  The DOL recognizes that “reasonable” does not always equate to “cheapest” and that the service provider offering the lowest cost services is not necessarily the best choice for the plan.  However, a responsible plan fiduciary will evaluate the cost, quality and type of services offered by all service providers.  The new disclosure rules are designed to assist fiduciaries in gathering the information they need in order to make an informed decision.  But that evaluation requires that the plan fiduciary confirms that all plan service providers are disclosing the information that is required under the new rules.

In addition, when the plan administrator of a participant- directed account plan assigns the investment responsibility to the participants, the administrator needs to take steps to ensure that participants are given sufficient information to make an informed decision.  This means the participants must receive detailed annual notices and quarterly fee and expense disclosures.  Fortunately, the DOL did specifically note in the regulations that when the administrator reasonably and in good faith relies on information provided by a service provider, the administrator will not be liable for the completeness or accuracy of the information.  But that disclaimer does not absolve the plan administrator from his duty to make sure that the required annual and quarterly disclosures are being made by the engaged service providers.

Plan administrators need to ask questions, understand what is happening with respect to the plan and the various investment and service fees that are charged, and create a paper trail that documents a pattern of due diligence in selecting plan service providers that are able to comply with the new rules.

So how is the administrator, who is probably not a retirement plan expert, supposed to monitor the myriad complex requirements?  Our first suggestion, as always, is for employers to retain outside legal and tax advisors who are experienced with ERISA (understanding, of course, that these individuals and entities may also be subject themselves to the disclosure rules).  Secondly, administrators should make sure that service providers are communicating with them about the new requirements.  We have outlined below a basic summary of the requirements and the deadlines that can assist fiduciaries and plan administrators in evaluating whether or not the plan service providers are complying with the rules.

408(b)(2) disclosure rules:  These apply to providers (like registered investment advisors, brokers, recordkeepers, and TPAs) who enter into an arrangement or contract to provide services to the plan.  These providers must disclose information that will assist the plan fiduciaries in determining whether the compensation they are paying for the service is reasonable.  The disclosure information must also identify any possible conflicts of interest that may affect the provider’s performance.  Under the newly released final regulations, the due date for compliance with the disclosure rules is July 1, 2012 (assuming a calendar year plan).

Review the provider’s written contract.  The contract must explain:

  • what services will be provided
  • whether the provider is a fiduciary
  • how the provider will be paid from the plan’s assets (will the plan be billed or will the provider be paid directly from the plan account?)
  • the types of compensation the provider will receive (direct payment from plan, payment from affiliate or subcontractor, related-party compensation, transaction based compensation, commissions, 12b-1 fees, and indirect payments like gifts and awards, etc.)
  • details of any revenue sharing that will be used to offset recordkeeping fees
  • the redemption fee, management fee, front-and-back-end load, expense ratio, and other expenses for each designated investment alternative in the plan
  • investment alternative information and expenses for new investments that are added to the plan after the initial disclosure
  • what the provider will charge in connection with the termination of the contract

If the service provider does not comply with the disclosure requirements, notice of the failure must be given to the DOL.

404(a)(5) disclosure rules: These regulations require the regular and periodic disclosure of certain plan and investment information to the plan participants in any plan that uses participant- directed individual accounts.  The main focus of the regulations is on expenses and fees.  The following checklist should be helpful in making sure that the plan service providers are supplying the necessary information required under the rules:

  • do the quarterly benefit statements have a separate column that lists any expenses and fees that were actually charged to the participant during the quarter (required starting with the September 30, 2012 statement for a calendar year plan)?
  • are the quarterly benefit statements being issued within 45 days after the end of the quarter?
  • is each participant receiving a notice when he is first able to direct investments, then annually thereafter, that gives basic plan information, including:
      1. the plan level limits
      2. information about any transfer restrictions or voting rights
      3. the different investment options that are available
      4. any self-directed brokerage account option
      5. any potential recordkeeping or accounting fees that will be imposed against the account and how those fees are calculated
      6. any potential individual fees that may be charged for specific actions, like loan fees, fees for individualized investment advice, sales loads or charges on purchases/redemptions, etc.  This disclosure may be included in the SPD (which would require the SPD be handed out every year) or on the benefit statement or as a stand-alone notice.
  • is each participant receiving a notice when he is first able to direct investments, then annually thereafter, that describes the plan investments, including:
      1. identifying information for each investment (name, type of investment, web site address, etc)
      2. performance data for 1, 5, and 10 years
      3. broad based index benchmark information for 1, 5, and 10 years
      4. fees and expenses
      5. a statement that fees and expenses are only one factor that participants should consider when selecting investments
      6. a statement that fees can substantially reduce the growth of the account and that the participant can visit the DOL’s website for an example of the long-term effects of fees
      7. trading restrictions
      8. expense ratio
      9. glossary of terms

This investment notice requirement must be satisfied by furnishing a chart that compares all of the plan’s investments, with the above information listed for each investment.

  • is there a website available to participants that provides the name of each investment provider and describes the investments (including principal strategies and risks, the type of assets held by the investment, quarterly performance data, fees and expenses, objectives and goals)?


401(k) fees directly impact the wealth accumulation of the plan’s participants.  The DOL is very concerned with ensuring that plan fiduciaries are carefully selecting and monitoring the providers that are servicing the plan.  Plan fiduciaries need to understand the new rules, keep open communication with their providers and ensure that all of the required disclosures are given.



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