The Department of Labor published its final rule on participant fee disclosure, Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans, on October 18, 2010. This initiative is the final step in the department’s three-pronged, multi-year program to increase fee transparency for defined contribution plans. The first was the DOL’s revision of the Form 5500 to identify plan fees. The second was enhanced service provider disclosure to plan sponsors of direct and indirect compensation and potential conflicts of interest that may affect their objectivity. (As discussed our Fall 2010 Fiduciary Commentary). With these initiatives, it is clear that the DOL will make disclosure of plan fees a key item on their enforcement agenda in the future.
The regulations mandate plan and investment expense information be provided to plan participants. The new disclosures will reveal information that was previously not required. All plan participants, regardless of plan size, will receive this information beginning in plan years on or after November 1, 2011 (e.g., for calendar year plans, the plan year beginning January 1, 2012).
The highlights of the new rules are:
- Administrative Expenses: The rules require the disclosure of how fees are charged (i.e. on a per participant or on account balances basis). This should bring to light the fact that participants with larger account balances often bear a proportionately larger burden of plan fees than investors with smaller account balances. Administrative fees include costs for general plan services such as recordkeeping, legal and accounting.
- Revenue Sharing Payments: The rules do not require the disclosure of revenue sharing from the plan’s investments. In a compromise with the industry, it was determined that this potentially confusing economic arrangement did not need to be detailed.
- Benchmarking: Investment returns must be compared to a broad-based market index. The rule also allows the mix of multiple market indexes for investments with a combination of equity and fixed income exposure (i.e. Target Date Funds).
- Investment Turnover: All plan investments (with the exception of employer stock funds and stable value funds) must calculate and disclose their portfolio turnover. This is an interesting development, as the true costs associated with buying and selling securities can be substantial. Nor are they included in an investment’s expense ratio, as frequently thought.
- Timing: Participants must also receive statements regarding fees at least quarterly. The statement must depict the dollar amount of the plan fees charged or deducted from their individual account with a description of the services charged for.
Additionally, the investment related disclosures must be presented in a chart to facilitate a comparison among the plan’s investment alternatives.
Regulatory compliance for the participant disclosure rules represent a marked improvement from the most recently proposed 408(b)(2) regulations (where currently the burden is on the plan sponsor to insure they received all the required disclosures from their service provider). In contrast, this proposal allows the plan sponsor to rely on its service provider to fulfill all participant disclosures.
As many industry studies have revealed, most plan participants are simply not aware of their retirement plan fees. The effect of the new rule (and the two prior fee disclosure initiatives) is to provide greater participant fee transparency and to enhance the ability of companies to identify and benchmark their fees. The DOL believes that with this new information, participants will be better equipped to make informed investment decisions.