DOL Extends Compliance Deadline for Plan-Level Fee Disclosure Rules

The rules governing retirement plan fee disclosures at both the plan and participant levels are undergoing a major overhaul. The complexity of the issues at hand has led the Department of Labor’s Employee Benefits Security Administration (EBSA) to extend by several months the compliance deadline applicable to interim final regulations on plan-level disclosures under ERISA Section 408(b)(2). The reason for extending the applicable date is that EBSA did not have sufficient time to take into account the many public comments it received on the interim final regulations.

The regulations, originally slated to go into effect on July 16, 2011, will now become applicable January 1, 2012. They will apply to “covered service providers” that reasonably expect to receive $1,000 or more in direct or indirect compensation from a retirement plan in a given plan year.

Covered service providers, including third party administrators, registered investment advisors, broker-dealers and recordkeepers, have always had to disclose the services they provided to plans, and the compensation they received, however such disclosures largely have been limited to the service agreement the provider entered into with the plan fiduciary (if any), and information required to be reported on Schedule C (Service Provider Information) to the Form 5500 Annual Return/Report (a Schedule only required for plans with 100 or more participants).

The new regulations will require these entities to provide a written, detailed disclosure of services provided to, and fees and expenses received from, all qualified retirement plans they serve. The new rules are intended to bring to light fees and charges that formerly were hidden to plan sponsors in a variety of ways, including “bundled” plan service arrangements.

Technically, the disclosures are required to be made to plan sponsors and other fiduciaries in order for the fiduciary to conclude that the service arrangement is “reasonable” in light of the services provided; only “reasonable” service provider arrangements are exempt from “prohibited transaction” rules that otherwise apply to the use of plan assets. In their proposed form, the regulations required that service providers enter into a specific written agreement with plan fiduciaries; the interim final regulations require that the disclosures be made in writing but do not specify the format.

The regulations are the second in a three-part effort by the Department of Labor to improve fee transparency and disclosure, particularly with respect to 401(k) fees. First, they revised Schedule C to the annual Form 5500 Return/Report, which reports Service Provider Information. The revisions, which required disclosure of indirect forms of compensation for the first time, took effect for plan years beginning on or after January 1, 2009. The second part is the plan-level disclosures discussed above, and the third part is participant-level disclosures that plan sponsors must make under ERISA Section 404(a)(1). Final regulations describing these disclosures go into effect on January 1, 2012, although it is possible that this will be pushed back as well.

Each of these developments – Schedule C revisions, plan-level disclosure rules, and participant-level disclosure rules, are extremely important and will be the subject of further discussion on this blog. In addition I hope to address the following related regulatory changes in the coming weeks and months:

• Proposed regulations expanding the definition of an ERISA fiduciary (the first such change in over 30 years);
• Proposed regulations related to target date retirement funds and “qualified default investment alternatives” or QDIAs, two categories that overlap to a degree; and
• Regulations related to lifetime income options, including recently re-introduced Senate Bill, the Lifetime Income Disclosure Act, which would require plan account balances to be reported not just in a lump sum but as a projected stream of retirement income.

If there could be said to be a common thread among all these pieces of legislation, it is that the disclosure and fiduciary rules that sufficed when traditional pension plans prevailed, are no longer adequate in the age of the 401(k). The 401(k) model largely leaves participants on their own when it comes to savings goals, investment choices, and in-service access to retirement savings, and the end result is that the average 401(k) account balance in America today is scandalously low.

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Filed under 401(k) Plans, Fiduciary and Fee Issues

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