July 1, 2012, will bring new requirements for disclosure fees and compensation paid in connection with certain retirement plans—which include 401k and 403b plans. In the first installment of this 3-part video series, HR.BLR.com Editor Chris Ceplenski outlines the notifications that must be made to the U.S. Department of Labor (DOL) as well as notifications service providers must make to plan sponsors.
Hi, I’m Chris Ceplenski from HR.BLR.com and I’m here to talk to you about the upcoming 401k fee disclosure requirements.
Changes to the Employee Retirement Income Security Act of 1974—or ERISA—mean that soon, sponsors of certain retirement plans will have some new responsibilities. There are new requirements to disclose fees and compensation paid in connection with these retirement plans—which include 401k and 403b plans.
As a plan sponsor, you will receive new information about fees paid by the plan. You will also need to give participants some new information. The new rules are intended to improve retirement outcomes for plan participants. In order to compare investments and make the best possible investment decisions, participants need to understand the costs involved. These new rules benefit you as a plan sponsor, too. You have the fiduciary duty to make decisions about which providers are the best value for your plan. To do that, you also need to understand the fees.
There are three parts to the new fee disclosure rules, all designed to clarify fees and compensation associated with servicing covered retirement plans. Part one requires notifying the Department of Labor. Part two requires service providers to notify plan fiduciaries. Part three requires plan fiduciaries to notify participants.
The first part of the new fee disclosure rules notifies the DOL about the fees and compensation paid to the plan’s service providers. This part became effective with the 2009 plan year, when this information was first required on the Form 5500 Schedule C. The information that must be reported on the Schedule C is different in some respects than the information required to be reported to plan fiduciaries and to participants. Your service providers should send you the information you need to properly file the 5500 and accompanying schedules.
The second part of the new fee disclosure rules requires plan service providers to report to you—the plan sponsor—compensation they receive in connection with your plan. By July 1, 2012, ERISA Section 408(b)(2) says that service providers must disclose a description of the services they are providing, with enough detail for you to make sure the plan is getting the right services. If you don’t get enough information, ask for more. It is your responsibility to get the information you need in order to perform your fiduciary duties, one of which is to evaluate the provider’s services and costs.
Providers must also disclose a complete disclosure of any and all fees and compensation, if they reasonably expect to receive more than $1,000 for certain services to the plan. They also must disclose payments they make to their affiliates or subcontractors if those payments are charged directly against the plan assets or if they are transactional, like commissions.
Besides determining whether the fees and compensation are reasonable, fiduciaries must also decide whether or not the payments represent a potential conflict of interest. ERISA includes provisions prohibiting conflicts of interest. Any arrangements between the plan and its service providers—like consultants, recordkeepers or investment advisors—are prohibited by ERISA. However, the law allows for some exceptions.
The provider must also provide a statement of whether or not it is serving as a plan fiduciary or as a registered investment advisor. If you believe a provider to be acting as a fiduciary, but there is no statement made about it, you should request a written statement about the status.
Which providers will send disclosures to you? What do you do with the information? What do you need to disclose to plan participants? We’ll answer these questions in coming installments of this video series.
And, for much more on your requirements, BLR’s offers a new resource— 2012 New Fee Disclosure Rules: What You Need to Communicate About 403(b) and 401(k) Plan Fee—which provides everything you need to know about the new 401k Fee Disclosure Rules.
This downloadable resource includes background information about the new fee disclosure rules and about your role as plan fiduciary; specifics about the information that will be reported to the plan fiduciary; suggested procedures that can demonstrate that you are properly undertaking your fiduciary responsibilities. information about what and how to disclose required information to plan participants and much more.
For HR.BLR.com, I’m Chris Ceplenski, and I’ll see you in the next video of this series.
Watch Part II and Part III of this series.