Are you aware of the new 401(k) fee disclosure rules going into effect this year? When administering 401(k) retirement plans, you need to know what’s coming down the regulatory pipeline. In a BLR webinar titled "New 401(k) Disclosure Deadline: What You Must Know to Comply," Tiffany Downs outlined the details behind the new 401(k) fee disclosure rules and what it means for you.

401(k) Fee Disclosures: Two Types

In the upcoming regulations, there are two types of 401(k) fee disclosures going into effect. These are service-provider disclosures and participant fee disclosures.

• Service-provider fee disclosures. Downs advised that "the deadline for covered service providers to provide those disclosures to plan administrators and fiduciaries is July 1, 2012. That deadline was extended in February of this year; initially the deadline was April 1, 2012."
• Participant fee disclosures. "These are the disclosures that a plan administrator or plan fiduciary has to provide to participants. It’s really directed to participant directed accounts, in which the participant can select investment options." The disclosure requirements for the participant fee disclosures are in two-parts. Initial disclosures are due by August 30, 2012; quarterly disclosures are due by November 14, 2012.

401(k) Fee Disclosures: Background

You may be wondering why this all came about: Weren’t 401(k)s doing fine? Downs explained that the fees associated with such plans were not always clear. "The DOL recognized that plan administrators and fiduciaries were not able to determine . . . what services were provided by service providers or even how they were compensated. "There were hidden fees involved, and a lot of it had to do with service providers who would provide record-keeping at no cost, and a plan sponsor or fiduciary wouldn’t have enough information to determine how the record-keeper was being compensated because sometimes there was compensation flowing between several entities. Also, because of that, sometimes services were provided by entities that the plan administrator or plan fiduciary may not be aware of, and that precluded the plan administrator from determining whether there were potential conflicts of interest."

No one likes hidden fees or paying for services that are not clear. So the DOL stepped in. They became very interested in assisting plan fiduciaries in determining what services were provided by whom and how those service providers were being compensated. So, that was the genesis for the DOL to issue their three-part initiative to increase transparency of fees and expose conflicts of interest. The three parts:

• Revision of Schedule C of Form 5500. Now service providers paid with plan assets have to be disclosed if the compensation to them is more than $5,000. This took effect in 2010.
• Service provider disclosure requirements – ERISA section 408(b)(2).
• Participant disclosure requirements – ERISA section 404(a)(5).

(ERISA is the Employee Retirement Income Security Act)

In practical terms, Downs explained: "If you are a plan administrator or a plan fiduciary, ERISA requires that fiduciaries have to prudently select and monitor their service providers. So, once you select a service provider and you think they’re doing a good job, you can’t just continue to hire them as a service provider. Every year you should be looking at their fees and what services they’re providing and whether those arrangements are reasonable and whether the compensation that is paid to those service providers is reasonable compensation for the services that they provide to the plan."

You may be surprised to learn that the vast majority of participants believe their plan is free. When they learn that they are indeed paying to invest in the retirement plan, participants may react negatively. If you employ right strategies, you may be able to avoid some of these negative reactions. Plan sponsors should also be ready to respond to participant inquiries about the disclosures. Help with setting up a system to handle these inquiries is located in this report, available for download at the address on your screen.

BLR's new resource, 2012 New Fee Disclosure Rules: What You Need to Communicate About 403(b) and 401(k) Plan Fees, will help you communicate clearly and accurately to your employees and participants and provide ideas you can use to respond to participants inquiries about the fee disclosures.

Meanwhile, a recording of the 401(k) webinar featuring Tiffany Downs is also available.

Attorney Tiffany Downs is a partner in the Atlanta office of Ford & Harrison, LLP, where she focuses her practice on employee benefits and is the head of the Employee Benefits Practice Group.