401(k) Fee Disclosures Type 1: Service Provider Disclosures
Service provider disclosures are the first of two types of 401(k) fee disclosures covered by the regulations. Downs gave us further details, explaining that “the compliance date for the service provider fees is July 1, 2012. A service provider . . . has to provide to a responsible plan fiduciary initial disclosures. And that is for all existing and new service provider contracts.” The initial disclosure should describe the services to be provided and the expected compensation (both direct and indirect), to permit evaluation of the reasonableness of the compensation.
This will be enforced on both sides, she continued. “Unfortunately, if a service provider fails to provide the disclosures to a plan administrator, there are consequences for both the service provider as well as the plan fiduciary. The plan fiduciary could be subject to an ERISA-prohibited transaction under ERISA section 406, and the service provider could be subject to [penalties] under the Internal Revenue Code section 4975. So, there’s incentive on the part of both parties to cooperate together and to obtain the disclosures that the service provider has to provide to the plan fiduciary.”
How does this affect you? What should you do? First, identify all of your covered service providers (CSPs). Monitor the receipt of disclosures from the CSPs, and contact any CSP that has not provided information by May 31, 2012. Once you receive the disclosures, review them to ensure adequacy and then analyze them for reasonableness of fees and potential conflicts of interest. Be sure to document the results of the analysis.
401(k) Fee Disclosures Type 2: Participant Fee Disclosures
Participant fee disclosures must be provided to participants as well as beneficiaries in participant-directed accounts. There are two types of required disclosures:
- Initial/annual disclosures. For calendar plan years, initial annual disclosures of plan-level and investment-level information (including associated fees and expenses) must be provided by August 30, 2012 and annually thereafter.
- Quarterly disclosures. The first quarterly expense statement is required by November 14, 2012, providing third quarter expenses actually deducted from participant’s accounts.
For the initial/annual disclosures, Downs told us that there are “two levels of disclosure. One has to do with plan-level or plan-related information (just general information about the plan, what the investment options are, and then general information about what fees can be incurred). Then, there’s a second type of investment-level information that has to do with what particular expenses are charged by both the plan and can be incurred by an individual based on their choices selected under the plan.”
The initial/annual disclosures should include general plan information, a list of all of the available investment options, and information on the administrative and investment fees and expenses. It should also note the individual expenses paid by a participant depending on their choices. This information has to be provided to individuals with an account balance (including beneficiaries and alternate payees) as well as individuals who are eligible, but not yet enrolled.
Quarterly disclosures, on the other hand, should include the dollar amount of administrative and individual fees that the participant has incurred, and a description of the services for the fees charged to the participant’s account. Since these disclosures are about actual fees incurred, they’re provided only to individuals with account balances under the plan.
Knowing this, what should you do next? First, you should identify all plans for which participant disclosures must be provided. Then identify all eligible employees, participants and beneficiaries who are entitled to receive the disclosures. Determine who will provide disclosures (will this be a record keeper or plan administrator or someone else?). Finally, determine the distribution method of the disclosures (electronically or paper).
These are just the basics, of course. For more detailed information on the 401(k) fee disclosure regulations, order the webinar recording. To register for a future webinar, visit http://catalog.blr.com/audio.
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.