Fee Disclosure Is to Ultimately Help Participants Make Informed Choices

July 16, 2010 (PLANSPONSOR.com) - Fee disclosure rules are designed to “make sure everyone knows what they are paying for and how this affects plan balances,” according to Phyllis Borzi, Assistant Secretary of Labor of the Employee Benefits Security Administration (EBSA).

Borzi told the press in a teleconference that “the ultimate goal is to empower participants to make more informed choices of investments, and the first step is to allow plan fiduciaries to make informed choices.” She noted that section 404(a)(1) of ERISA requires plan fiduciaries, when selecting or monitoring service providers and plan investments, to act prudently and solely in the interest of the plan's participants and beneficiaries and for the exclusive purpose of providing benefits and defrayingreasonable expenses of administering the plan, but this has been difficult with so many plans using bundled services for which the fees are not broken down.  

The interim final rule published by the EBSA on Thursday provides that because certain services and costs are so significant or present the potential for conflicts of interest, information concerning those services and costs must be disclosed without regard to whether services are furnished as part of a bundle or package. For example, service providers must disclose whether they are providing recordkeeping services and the compensation attributable to such services, even when no explicit charge for recordkeeping is identified as part of the service contract.  

Borzi admitted that breaking out recordkeeping fees was a point of contention in comments received on the proposed regulations, but she said the department heard from so many plan sponsors that they think recordkeeping is free, so the agency ultimately concluded that it is important for plan fiduciaries to understand that recordkeeping is not free, particularly fiduciaries for small and medium plans that don’t have the kind of leverage to make prudent decisions with providers.  Press conference attendee Nevin Adams, Editor-in-Chief of PLANSPONSOR magazine, noted that recordkeeping is a significant percent of cost of bundled services, sometimes up to 20%.  

 Michael Davis, EBSA Deputy Assistant Secretary,said that also as an alternative to telling someone there may be a conflict of interest, the EBSA was convinced that specifically disclosing whose paying whom for what services would work better.  

The interim final rule focuses on disclosure of fees by service providers to plan fiduciaries. Borzi said the second step in reaching the ultimate goal is a final rule on fee disclosure to participants, which has been submitted to the Office of Management and Budget, and should be published soon. “After that we will have an organized system of helping plan fiduciaries and participants make informed choices,” she declared.  

While the proposed rules applied to defined benefit, defined contribution, and health care plans, the interim final rule only applies to DB and DC plans. Borzi said rules regarding fee disclosure for health care plans will be addressed separately. She also noted that the agency is doing its best to make sure definitions in fee disclosure regulations match up with those used for Form 5500 Schedule C reporting.  

Borzi explained that an interim final rule has the full effect of law, but on an interim basis. The substance is what the agency wants, but after comments, it will clarify points in the rule or issue additional guidance. If there are any changes, the agency will issue a final regulation.