It’s not unusual for people to be unaware of their fiduciary status. The confusion comes in that there are basically two distinct types of fiduciary: named fiduciaries (whereby the fiduciary’s name is listed within the retirement plan documents, removing any trace of mystery) and functional fiduciaries. A functional fiduciary is defined by the Employment Retirement Income Security Act (ERISA) as one who (1) exercises discretionary authority or control with respect to the management of an employee benefit plan and its assets, (2) renders or has authority or responsibility to render investment advice for a fee, or (3) has discretionary authority or responsibility in the administration of an employee benefit plan. If you meet any of these three criteria, then you’re probably a fiduciary and, consequently, charged with prudently overseeing your organization’s retirement plans in the best interest of its participants and beneficiaries.
In addition to fulfilling this responsibility, the Department of Labor (DOL) recently issued fee disclosure requirements that may prove challenging to organizations that aren’t prepared:
- According to ERISA 408(b)(2), service providers that receive more than $1,000 in compensation in connection with their services must provide fee disclosures to plan sponsors effective April 1, 2012.
- According to rules under ERISA section 404(a), plan sponsors of calendar year participant-directed plans must provide participant-level fee disclosures beginning May 31, 2012.
This article contains a brief overview of the rules and a few suggestions to assist you in preparing to comply with these requirements.
Service Providers Must Provide Fee Disclosures to Plan Sponsors
Because the DOL believes that fee disclosures are necessary to assist plan fiduciaries of defined contribution and defined benefit plans in performing their duties, it has issued the 408(b)(2) regulations. The primary goal is to provide plan sponsors/fiduciaries with the information they need to determine whether the fees associated with the retirement plan(s) are “reasonable.” How do you know if fees are reasonable? By benchmarking them to determine where you stand relative to your specific circumstances and the market as a whole.
Service providers that fail to comply by the deadline may be subject to severe penalties. We suggest reviewing the regulation, requesting the required data from the plan providers, and benchmarking the information now in order to meet the requirements within the allotted time frame.
Plan Sponsors Must Provide Participant-Level Fee Disclosures for Calendar Year Plans by May 31, 2012
The goal behind this requirement is to ensure fiduciaries of participant-directed plans are providing appropriate information regarding fees that impact participant acounts so that participants and beneficiaries can make more informed decisions. The information that must be provided is extensive and falls into two categories: plan-related information and investment-related information.
Plan-related information has three subcategories:
- General plan information. This includes items such as how participants make investment elections, the investment options available, when participants can make changes, and descriptions of investments such as self-directed brokerage accounts.
- Administrative expenses. Recordkeeping, legal, or accounting expenses passed through to participants must be disclosed.
- Individual expenses. These include additional expenses that could be passed through to participants, such as loan fees.
Investment-related information includes a number of items that must be provided to participants as highlighted below:
- Fees and expenses. For most investments, fiduciaries must declare any withdrawal penalties or restrictions for each option as well as provide each option’s total operating expenses/expense ratio. In addition, for the first time, investments expenses must be expressed as percentages and dollar amounts so that participants have a better understanding of the total estimated costs of investment options.
- Performance data. Information about the rates of returns for the various investments must be disclosed. For investments such as mutual funds, this would include the average annual return for investments for one-, five-, and 10-year periods. Other investments must disclose annual rate and terms of the investment.
- Benchmarks applied to each investment option. This must be a broad-based index showing one-, five-, and 10-year performance time frames for investments that don’t have a fixed rate of return.
- Internet website. Participants must be provided with the website address where they can access additional information about specific investments.
Most of the investment-related items must be presented in a comparative chart format and include a glossary of terms explaining investment terms.
Both the plan-related and investment-related information have requirements regarding when and how frequently information is provided to participants. We suggest holding an employee meeting or distributing written communication regarding the changes prior to distributing the disclosures; this way, participants won’t be surprised by the amount of data they receive. Please note that disclosures must be sent to every eligible participant — not just those currently participating. Failure to comply with these new regulations may result in significant penalties.
These requirements are an obligation for certain ERISA fiduciaries — not an option. Although they may seem daunting, the end goal is admirable: providing greater plan fee transparency and affording participants the necessary information to make better decisions for their futures. For a complimentary retirement plan fee review, or for more information about these impending requirements, please contact Kimberly Shadduck at 312.602.3639 or Susan Shoemaker at 248.223.3722.