The Department of Labor recently released final regulations requiring U.S. retirement plan sponsors (1) to receive new direct and indirect fee disclosures from their service providers and (2) to provide fee and investment performance disclosures to participants in participant-directed individual account plans. Disclosures under these new regulations must initially be made no later than July 1, 2012, and August 30, 2012, respectively.
Service Provider Fee Disclosures -- ERISA § 408(b)(2)
In order to avoid ERISA's prohibited transaction restrictions, the provision of services between a plan and a service provider must meet the prohibited transaction exemption requirements of ERISA § 408(b)(2). Previously, this generally only required contracts and arrangements between plans and their service providers to relate to necessary services, to include reasonable compensation terms and to be terminable upon relatively short notice. However, in final regulations released by the Department of Labor earlier this year, all such contracts and arrangements between a plan and a covered service provider must meet new, heightened fee disclosure requirements as well.
These new regulations generally apply to service providers that reasonably expect to receive $1,000 or more in direct or indirect compensation under contracts or arrangements with a retirement plan. The regulations require covered service providers to disclose in writing to a plan fiduciary several key terms, including the following:
- A description of all services to be provided to the plan;
- Whether the service provider, an affiliate or a subcontractor will or reasonably expects to provide the services as a fiduciary or registered investment advisor;
- A description of all direct and indirect compensation that the service provider, an affiliate or a subcontractor will receive;
- A description of all compensation that will be made among the service provider, affiliates and subcontractors;
- A description of compensation for terminating the contract or arrangement; and A description of the manner in which compensation will be received, such as whether the plan will be billed or fees will be deducted from the plan's accounts or investments.
Fiduciaries of certain investment vehicles must also disclose additional information about each investment contract, product or entity that holds plan assets, including any compensation that will be charged directly against an investment and any annual operating expenses.
Initial disclosures under the regulations must be provided by service providers to existing plans by no later than July 1, 2012. Disclosures must be provided "reasonably in advance" of entering into new contracts and arrangements. Covered service providers must also disclose to plan fiduciaries any change in the information as soon as practicable, but generally no later than 60 days from the date the service provider is informed on the change.
Participant Fee and Investment Disclosures -- ERISA § 404(a)(5)
In addition to the above described service provider disclosures, the Department of Labor has also released final regulations requiring sponsors of participant directed individual account plans (such as 401(k) and certain 403(b) plans) to provide detailed, annual disclosure notices under ERISA § 404(a)(5) to all plan participants on or before the date that they may first direct their investment accounts. For calendar year plans, an initial notice must be given to participants by August 30, 2012, and then annually thereafter.
This notice generally requires disclosure of plan administrative and individual fee and expense information (e.g., plan loan origination fees or qualified domestic relations order processing fees), the fees and expenses associated with individual investment options (e.g., annual operating expenses, transfer fees or redemption fees), any restrictions on transfer or withdrawal associated with an investment option, information about any target-date or so-called lifecycle investment funds available under the plan, and detailed information about the performance of the plan's various investment options. Required investment information includes multiple-year average annual return and benchmark return information for each investment option provided in a comparative chart format.
In addition to this annual disclosure, the new regulations also require plan sponsors to ensure that participants receive quarterly statements detailing any actual fees charged to their individual investment accounts in the prior quarter, beginning no later than November 14, 2012.