What employers need to know about the new federal fee and expense rules
Q. Our retirement plan financial adviser told us that new federal rules require him to provide us with information about our 401(k) plan investment fees and expenses. He also told us that we have to provide a new disclosure document to each 401(k) plan participant that includes information about their specific fees and expenses. What do we need to do with the information he provides to us and what information do we need to give our employees?A. As the financial adviser mentioned, two new retirement plan disclosure regulations are effective early in 2012 that will bring significant change to the retirement plan landscape.No later than April 1, retirement plan service providers are required to disclose fee and expense information to employers and plan fiduciaries. It is critical that employers and plan fiduciaries carefully review this information as they are responsible for ensuring that retirement plan fees and expenses are reasonable.In addition, no later than May 31, retirement plan participants must be told something they never knew before — how much they pay each quarter for their 401(k) plan. After receiving this information for the first time, employees are likely to ask questions of their employers and scrutinize the fees charged to them for services many employees believed were free.The Employee Retirement Income Security Act of 1974 (ERISA) requires employers and fiduciaries associated with 401(k) and other types of retirement plans to act solely in the interests of plan participants. As a result, fiduciaries must make a careful inquiry into the merits of any investment offered, including consideration of all fees and expenses paid from plan assets because generally the higher the fees and expenses, the lower the return for participants’ plan accounts.The idea of fully disclosing fees, expenses and conflicts of interest met with considerable opposition from industry groups. Nevertheless, the regulations require plan service providers to disclose comprehensive information to employers about the compensation they receive, both directly and indirectly, as well as whether services are being provided as an ERISA fiduciary and/or registered investment adviser.As a result, some service contracts will need to be modified or adopted to comply with the regulations. Extensive disclosures are now required before an employer enters into a contract with a service provider and any extension or renewal of the contract.In order to meet their ERISA fiduciary duties, employers and fiduciaries will need to carefully review the disclosures to verify that their plans are paying reasonable compensation for the services received. If a plan service provider does not make the required disclosures, in order to avoid penalties, the employer must request the information and notify the Labor Department if the service provider fails to provide the information within 90 days.In addition to the disclosure regulations to employers and fiduciaries, the DOL also adopted a participant fee disclosure under ERISA that requires regular and periodic disclosures to plan participants by employers.No later than May 31, plan participants must be provided with: • General plan information, including the investment options and how to provide investment direction • Investment option fee and expense information, past performance data, comparable benchmark returns, and a website address • A description of fees and expenses charged to participants and beneficiaries for plan administrative services, such as legal, accounting, and recordkeeping charges, as well as how these charges will be allocated to their individual accounts • A description of fees and expenses charged to a specific participant’s account based on actions taken by that participant, such as charges for processing loans or investment advice • The amount charged to the participant’s account during the preceding quarter for specified administrative expenses. Most retirement plan service providers have been working for months preparing to assist employers in complying with the disclosure rules.The regulations require disclosures to be made in a uniform format that is designed to help participants compare the plan’s investment options. Although some of this information is currently available to participants, information on fees charged to individual participants is not normally provided. As the required disclosures will not be simple for all employees to understand, employers should be prepared for employees to request assistance in understanding the information — and they should be prepared to justify and explain the fees and expenses.John E. Rich Jr., a director at McLane, Graf, Raulerson & Middleton, specializes in employee benefits, pension, ERISA and tax-related matters. He can be contacted at 603-628-1438, or email@example.com.