Without a clear understanding of fees associated with the services being provided to them and their plans, the sponsor and participants cannot make informed decisions related to their investment options and other plan-related issues.
The Department of Labor’s Employee Benefits Security Administration (EBSA), which oversees retirement plans subject to ERISA, has addressed the problem in three important ways: by editing Form 5500 filing requirements, by regulating provider-to-sponsor disclosure and by also regulating sponsor-to-participant disclosure. The updated Schedule C for the 5500 was implemented with the 2010 plan filings. The provider-to-sponsor disclosure is required by July 1, 2012, and the sponsor-to-participant disclosure is due by August 30, 2012 for calendar year plans.
Along with this sponsor-to-participant disclosure, sponsors will be required to provide multiple types of disclosures to participants, in forms that help them understand the fees being paid for services rendered, as well as to compare investment alternatives on their own. All disclosures are to be presented in an intuitive comparative table. The EBSA has released a template version of what these charts are to look like, and a link to this sample chart is included in the conclusion of this article.
It is very likely that the plan recordkeeper will produce all of the required information as listed below. Plan sponsors will not have to develop this material on their own. In addition, this final regulation protects sponsors from fiduciary liability created in the issuance of inaccurate and/or incomplete information by third-party providers.
However, it is the plan sponsor’s responsibility to ensure that the information is distributed to plan participants in a timely manner. Additionally, if there are multiple plan recordkeepers, the disclosure information produced by each vendor must be distributed to participants and beneficiaries in the same package. In these circumstances, the plan sponsor will need to convince one of the recordkeepers to collect the information from the other vendors and distribute all of the required information for each. This request may be greeted with resistance from the vendors, or may be met with the imposition of a fee to complete the task. Alternatively, the plan sponsor will need to put together the packages and distribute them to participants and beneficiaries.
Within plan-related disclosures, the DOL has created three major categories: general plan information, administrative expense information and individual expense information. All required updates may be placed in the summary plan descriptions or in quarterly plan statements.
All required information must be released to each individual participant or beneficiary on or before the date on which they will be able to deposit investments to the plan, and then annually after this first disclosure. If there is a change to any information, the updates must be produced at least 30 days and no more than 90 days prior to the official date of change. In the event of unavoidable or unpredictable circumstances beyond the plan sponsor’s control, all information must be released as quickly as possible.
Below is a listing of the different categories of disclosure information and what these communications must include.
General plan information:
- Information on how to provide investment instructions
- An explanation of any limitations on such instructions, including any restrictions on transfer to or from a designated investment alternative
- A description of or reference to the plan provisions regarding the exercise of voting, tender or similar rights
- Identification of any designated investment alternatives offered under the plan
- Identification of any designated investment managers
- A description of any brokerage windows, self-directed brokerage accounts, or similar plan arrangements that enable participants and beneficiaries to select investments beyond those designated by the plan
Administrative expense information
Plan sponsors or administrators are to produce information on all fees pertaining to general plan services, such as recordkeeping, legal or accounting charges. These fees may be charged by the plan to the participant account(s) and will not be included or referenced in the total operating expenses of any designated investment alternative. The sponsor must also release to the participants an explanation as to the basis on which these charges may be allocated to each separate person’s account, or how they may affect the total account.
To keep in line with the new notice of changes being made at least 30 days and no more than 90 days before the change, sponsors should be sure to review their service provider contracts to confirm all related periods fall within the time allotted by the new regulation.
On a quarterly basis, plan sponsors are now required to produce a report to participants and beneficiaries that includes the following information:
- The hard dollar amount of the fees actually charged during the previous quarter
- A description of the services for which the fees are charged
- If applicable, an explanation that, in addition to administrative expense fees and expenses disclosed, some of the plan’s administrative fees for the previous quarter were paid for with the total annual operating expenses of (i.e., Rule 12b-1, revenue sharing arrangements, or sub-transfer agent fees)
Revenue sharing arrangements with providers, as well as any other investment alternative, must be included in the information provided to the participants in the administrative expense information.
Individual expense information
Plan sponsors or administrators are to produce a detailed explanation of any and all fees that may be charged to participants that will not be included or referenced in the total operating expenses of any designated investment alternative. This explanation must be created on an individual basis to prevent any confusion on such fees as Qualified Domestic Relations Orders (QDRO) orders, fees for processing plan loans, investment advice, fees for brokerage windows, commissions, transfer fees, sales charges and any related or similar expenses.
On a quarterly basis plan sponsors are required to produce a report to participants and beneficiaries of the following information:
- The hard dollar amount of fees actually charged during the preceding quarter
- A clear description of the services for the fees charged
The plan sponsor must automatically provide, on or before the date the participant can first direct investments to their plan and at least once a year thereafter, the following details based on the most up-to-date information available:
- Identifying information, including the name and type or category of each investment
- Performance data for both fixed and non-fixed funds
- Benchmark information
- Fee and expense information for all investments
- Web-site information: the plan sponsor is required to produce and regularly update a website that is capable of acting as a second source of all specific information required to be released to participants and beneficiaries on the plan(s) and each designated investment alternative
- Glossary: the plan sponsor is required to produce a clear glossary of general investment terms, that can be easily obtained by participants and beneficiaries to aid them in making better decisions regarding their investments (if this glossary is provided via the plan’s web-site, the link for it must have a clear and concise explanation of what the glossary is for)
Investment-related disclosures and all previous information must be produced in the clear comparative charts created by the EBSA.
After directing funds to a designated investment alternative, if permitted within plan regulations, a participant must receive any and all literature provided to the plan relating to any pass-through voting, tender, or similar rights passed on to the participant.
Upon request of the participant or beneficiary, the following information must be immediately available:
- Prospectuses and all other similar documents
- A value statement for a share or unit of each investment
- Financial statements or reports (provided such information is given to the plan)
- A list of portfolio assets and values of such assets for the designated investment alternative, which is a plan asset according to ERISA regulations
In summary, the fee disclosure regulations for participants are dense and contain an overwhelming amount of information. It seems likely, particularly in multi-vendor situations, that there will be plenty of participant confusion leading to questions of the plan sponsor. As the industry drives towards the implementation of these new regulations, plan sponsors may wish to speak with their advisors both to better understand the disclosure information for responding to participant questions, and to confirm that they are on track to fulfill their fiduciary responsibilities.
Link to sample chart: www.dol.gov/ebsa/participantfeerulemodelchart.doc.
Alison Kellner, Analyst, Retirement, Cammack LaRhette Consulting
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.