Saturday, July 11, 2020

As Fee Disclosure Deadlines Approach, DOL Issues More Guidance

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Coordinated Benefits Group

(904) 281-0511

After over four years of regulatory starts and stops, plus the threat of a legislative solution, two separate sets of fee disclosure regulations issued by the Department of Labor (DOL) will finally become effective this summer.  As we noted in our May 2011 article, these regulations will add significant new responsibilities for fiduciaries of ERISA-covered retirement plans, as well as those who provide services to such plans.

Although the purpose of the regulations is to ensure that plan fiduciaries (and plan participants who direct the investment of their individual accounts) have the information they need to make informed investment decisions, many participants are likely to suffer information overload.  Moreover, even if much of the disclosure required by the new regulations is provided by mutual fund companies or other service providers, plan fiduciaries will still need to educate plan participants about the fee disclosure that is soon to come, and then be prepared for questions from participants who will now see - perhaps for the first time - how much they are actually paying for certain services.

Service-Provider Disclosures Under ERISA Section 408(b)(2)
The first set of regulations, issued under Section 408(b)(2) of ERISA, applies to contracts between service providers and fiduciaries of ERISA-covered retirement plans (both defined contribution and defined benefit).  These regulations, which are often referred to as the "service provider" or "408(b)(2)" fee-disclosure regulations, require covered service providers to disclose (in writing) to the responsible plan fiduciary both (i) the services that will be provided to the plan and/or plan participants under the contract, and (ii) any and all direct or indirect compensation that the service provider reasonably expects to receive in exchange for providing those services.

Under the final 408(b)(2) regulations that were published in February of this year, the required written disclosure must be provided - with respect to both new and existing services agreements - on or before July 1, 2012.  Failure to comply with these 408(b)(2) disclosure regulations constitutes a prohibited transaction (i.e., an "unreasonable" contract or arrangement between the plan and the service provider) - subjecting the service provider to a 15% excise tax and exposing the plan fiduciary to personal liability for breach of fiduciary duty.

Fiduciary Disclosures Under ERISA Section 404(a)
The second set of regulations, issued under Section 404(a) of ERISA, applies only to individual account plans (such as 401(k) plans) that provide for participant direction of investment.  Under these rules, often referred to as the "participant fee disclosure" regulations, a plan fiduciary must, as part of its general fiduciary duties under Section 404 of ERISA, provide each plan participant (on or before the date they are first allowed to direct the investment of their account and at least annually thereafter) with information regarding (i) fees and expenses for general plan administrative services ("plan-level" expenses), (ii) fees and expenses for individual participant transactions, such as loans or distributions ("participant-level" expenses), and (iii) fees and expenses associated with the plan's designated investment options.   In addition, at least quarterly, the plan fiduciary must disclose the actual dollar amount of plan-level or participant-level fees and expenses that have been charged to each individual participant's account during the previous quarter.
The deadline for providing the initial disclosure of the fees that may be charged against a participant's account is August 30 (60 days after the effective date of the service-provider fee disclosure regulations, above).  The deadline for providing the first quarterly disclosure of actual expenses incurred (for expenses incurred during the third quarter of calendar-year plans) is November 14, 2012. 

Final Service-Provider Fee Disclosure Regulations
As noted in our August 2010 article, the DOL issued "interim final" regulations under Section 408(b)(2) on July 15, 2010.  In response to comments from the service-provider industry, the DOL issued "final" regulations on February 3, 2012. 

The final service-provider fee disclosure rules clarify that:

  • Certain 403(b) contracts or custodial accounts (generally, those exempt from ERISA's plan audit requirement) are exempt from the 408(b)(2) fee disclosure rules;
  • Disclosures regarding "indirect" compensation must include a description of the arrangement between the payer of that compensation and the service provider;
  • Disclosures regarding the expenses of each designated investment alternative must be made in the same manner that the plan fiduciary is required to disclose those expenses to plan participants under the participant fee disclosure regulations;
  • The service provider must provide the information the plan fiduciary needs for its reporting and disclosure obligations "reasonably in advance of" the date by which the responsible plan fiduciary indicates it needs the information;
  • Changes in investment-related fee information need only be provided annually, whereas changes in other fee information must be provided within 60 days; and
  • In order to avoid a prohibited transaction (and a fiduciary breach) where a service provider fails to disclose the required information to an innocent fiduciary, the fiduciary must promptly request the information, and if the information is not disclosed by the service provider within 90 days, the plan fiduciary must determine whether to terminate or continue the contract.

Final Participant Fee Disclosure Regulations
The final participant fee disclosure regulations were published on October 14, 2010, and were to be effective for plan years beginning on or after November 1, 2011 (January 1, 2012 for calendar-year plans).  However, under a transitional rule, the initial disclosure (regarding the fees that may be charged against a participant's account) is not required to be made until 60 days after the effective date of the service-provider fee disclosure regulations (or if later, 60 days after the first day of the first plan year that begins on or after November 1, 2011).  In addition, the first quarterly disclosure of fees actually charged to each participant's account is not required until 45 days after the end of the first quarter that begins after the effective date of the service-provider fee disclosure regulations.

Because the service-provider fee disclosure regulations will now be effective as of July 1, 2012, the initial disclosures under the participant fee disclosure regulations must be made by August 30, and the first quarterly disclosure of actual fees charged will be due (with respect to the third quarter of the 2012 calendar year) on November 14, 2012.  By those dates, plan fiduciaries must be prepared not only to provide the required fee disclosures, but also to respond to participant questions and/or complaints regarding the fees that may be (or have been) charged against their accounts.

The Most Recent Guidance
On May 7, 2012, the DOL issued Field Assistance Bulletin 2012-02, which includes 38 questions and answers concerning the Section 404(a) participant fee disclosure regulations.  Among many items, the Field Assistance Bulletin clarifies that:

  • Section 403(b) annuity contracts or accounts that are exempt from the 408(b)(2) regulations are also exempt from the 404(a) participant fee disclosure regulations;
  • Fees that are paid solely from forfeitures (or, if the forfeitures are insufficient, solely by the plan sponsor) need not be disclosed;
  • Fees associated with a brokerage window or self-directed brokerage account must be disclosed to all participants, even if only a small percentage actually use that feature;
  • Investment-related fee information must be provided for investment options that are closed to new money, but still available for existing funds;
  • The plan may provide more than one comparative chart regarding investment-related fee information, but the charts must be provided at the same time and in the same mailing; and
  • A model portfolio comprised solely of investment options offered under the plan is generally not a separate "designated investment alternative" requiring separate fee disclosure.

The questions and answers in FAB 2012-02 provide useful answers to many of the most common questions regarding the participant fee disclosure rules.  Consequently, it is a "must read" for any plan fiduciary that is preparing for the August 30 compliance date.  The DOL also intends to issue a second set of frequently asked questions regarding the 408(b)(2) service-provider fee disclosure regulations.

Preparing for Fee Disclosure
So what should plan sponsors and fiduciaries be doing now?  If you have not already done so, you should contact each "covered service provider," meaning any service provider that expects to receive $1,000 or more for providing any of the following types of services to your plan:


  • Services as a fiduciary or a registered investment advisor;
  • You may also wish to schedule one or more employee meetings to educate plan participants about the additional fee information that they will be receiving in the coming months.
  • Third-party administrative services or brokerage services in connection with providing a "platform" of investment alternatives; or
  • Services for which the service provider receives "indirect" compensation (compensation from a party other than the plan or the plan sponsor).

As the "responsible plan fiduciary," you should obtain assurances that (i) the service provider will give you the information required under the 408(b)(2) regulations by July 1, 2012, and (ii) if the service provider is also providing a platform of investment alternatives, the service provider will give you the information that you are in turn required to disclose to plan participants (under the 404(a) fee disclosure regulations) by the August 30 deadline, and will be able to include fee information (regarding actual expenses charged to each participant account) on its quarterly statements by no later than November 14.

Robert A. Browning, Partner
Spencer Fane Britt & Browne LLP


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