At least the initial focus is likely to be from plans which are subject to Title I of the Employee Retirement Income Security Act of 1974 (ERISA), owing in large part to the hard deadlines for such disclosures. However, non-ERISA 403(b) plans — including governmental and church plans — also may begin focusing on this subject, if they have not done so already.
The Department of Labor (DoL) has made it clear for some time that plan fees, and the adequacy of disclosure for those fees, is an important concern. Requirements for more detailed Form 5500 disclosure began with the 2009 plan year. That was followed by publication of final regulations under ERISA Section 404(a), for participant disclosures, and “interim final” regulations under ERISA Section 408(b)(2), for disclosures by covered service providers (CSPs). Now, the DoL has published the “final final” ERISA Section 408(b)(2) regulations governing fee disclosures by CSPs. Many provisions of the interim final regulations remain the same, but some important new provisions were also included.
Here is a brief overview:
- The disclosure deadline for the CSP disclosures has been moved out to July 1, 2012, and the deadline for the earliest participant disclosures has been moved to August 30, 2012.
- Additional exclusions from the CSP disclosure include:
- Certain “orphaned” 403(b) contracts and accounts – the same ones that were already excluded from Form 5500 reporting
- Plans of self-employed individuals with no participants other than the sponsor and perhaps the sponsor’s spouse
Although the 403(b) exclusion applies expressly only to the CSP disclosure, it is expected that the same exclusion should be extended to the participant disclosure as well.
- One important new requirement: CSPs must provide the investment comparison chart which previously was required only in the participant (404(a)) fee disclosure. The purpose for this was to facilitate the plan fiduciary’s disclosure to participants and other eligible employees. This part of the disclosure would be subject to an annual update requirement to match the requirement for participant fee disclosure. Fund information in this disclosure is to be provided as of the prior calendar year-end.
- Identification of indirect compensation must also identify the source of the compensation and the reason the CSP is receiving it.
- Certain fees can be disclosed in ranges rather than as discrete values.
- Clarification regarding the ability to reference documents with regulatory review, such as prospectuses, for disclosure information, and insulation (only with respect to unaffiliated investments) from claims of inaccuracy with respect to such information.
- A disclosure roadmap, a subject of considerable recent speculation, will not be required, at least not initially. Generally, the purpose of a roadmap would be to identify exactly where in a cross-referenced agreement or document the referenced disclosure information can be found.
- Clarification that a failure by a CSP to provide required disclosures constitutes a prohibited transaction unless excused under applicable correction alternatives in the regulation, and does not avoid the prohibited transaction penalty tax even if the plan sponsor was able to avoid committing a prohibited transaction by notifying the Department of Labor of the deficiency.
The regulation preamble also responded to comments regarding the extent of information that a fiduciary could require of a CSP, essentially erring on the side of the plan fiduciary, and added that plan fiduciaries should take reasonable steps to terminate a relationship with a noncompliant CSP. The DoL did, however, provide some relief to CSPs, with respect to how quickly they must respond to a fiduciary's request for information, tying it to the fiduciary's disclosure deadline rather than setting a fixed number of days to respond.
In related developments, both the United States Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) have provided effective relief to ERISA plans providing the participant disclosures, particularly with respect to what will be, in effect, stale data. (SEC and FINRA requirements generally would require such data to be updated quarterly, not annually.) To date, however, this relief does not appear to extend to non-ERISA plans that are not required to adopt these disclosure requirements.
Some non-ERISA plan sponsors and service providers to those plans have begun discussing fee disclosure and the extent to which at least some of the ERISA disclosure requirements may be appropriate outside the scope of ERISA. One place to start with such discussions is the nature and extent of existing fee disclosures. In many non-ERISA plans participants already receive substantial government-mandated disclosures, under state insurance law as well as federal securities laws. This may be most pronounced for many 403(b) plan participants whose annuity contracts and mutual funds within 403(b)(7) custodial accounts can be subject to multiple layers of regulatory requirements. It is also worth noting that many non-ERISA plans are not subject to fiduciary requirements outside of ERISA, and that even for those that are (whether under state law, common law, or perhaps simply voluntarily assumed) in most cases these specific ERISA requirements simply will not apply. Still there may be certain benefits to more focused summaries of fee information, especially if they can be provided without overly taxing the plan sponsor's already limited resources. And, fortunately, these non-ERISA plans are free to adopt the requirements in whole, in part, or not at all.
This provides considerable flexibility because these plan sponsors can tailor any fee disclosure requirements more appropriately to the needs of their plans. In the case of 403(b) plans it is not hard to find examples of fee disclosure, past and present. In California and Texas, detailed fee information for eligible 403(b) products is publicly available (across the country) on websites which are required to be periodically refreshed. More recently, a proposed model disclosure for public k-12 uses a key element of the ERISA participant fee disclosure (the investment comparison chart), thus taking advantage of information already prepared by service providers supporting both ERISA and non-ERISA plans and potentially avoiding costly new programming and development. A non-ERISA plan sponsor might choose to combine these two approaches, old and new, by posting the comparative charts to a website that is available to all eligible employees and plan participants. A plan sponsor considering such an approach, however, likely will be hoping that the SEC and FINRA extend their relief to non-ERISA plans using the ERISA comparative chart.
As July 1 approaches
There is likely to be considerable commentary on the subject of fee disclosure in the weeks and months ahead. The story of this new round of fee disclosure and its impact on the lives of plan fiduciaries, plan participants, and service providers, is only now being written.
Richard Turner, vice president and deputy general counsel, VALIC.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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