As the effective date for compliance with new Department of Labor (DOL) regulations regarding 401(k) plan fee transparency approaches, the pressure on plan sponsor fiduciaries to make prudent decisions regarding 401(k) plan fees increases.  Plan sponsors need to have in place a rigorous governance process to deal with fee decisions and to explain their decision-making to plan participants if necessary. As part of this process, plan sponsors are establishing formal Fee Policy Supplements to Investment Policy Statements to govern fee decisions and importantly, to demonstrate prudent process.

DOL Regulations

The DOL's disclosure regulations are due to take effect in 2012 for calendar-year 401(k) plans.  These regulations include the so-called "service provider" regulations, and the "participant disclosure" regulations.  A Fee Policy Supplement is a useful adjunct to plan sponsors' compliance with the participant disclosure regulations, and a tool to integrate and use the information plan sponsors receive from service providers in accordance with the service provider regulations.

The "service provider regulations" require fiduciaries of all qualified plans to obtain fee disclosure and conflict information from plan service providers. Further information on the requirements of the service provider regulations is available here. The "participant disclosure regulations" require fiduciaries to provide plan and investment-related information to defined contribution plan participants and beneficiaries eligible to direct the investment of their accounts.

On July 14, the DOL extended the deadline for compliance with the service provider regulations to April 1, 2012, regardless of the applicable plan year.  The DOL also confirmed that the initial deadline for annual participant disclosure for calendar year plan would be May 31, 2012.

Effect of the DOL Regulations on Plan Sponsors

The DOL's move to greater fee transparency, embodied in the new regulations, places significant pressure on plan sponsors to make sophisticated decisions concerning 401(k) plan fees that comply with ERISA's requirements.  Plan sponsors must integrate their receipt of information under the service provider regulations and their compliance with the participant disclosure regulation into their management of their fiduciary duties to act prudently in the best interests of plan participants and beneficiaries.

To facilitate this integration and compliance, plan sponsors are establishing Fee Policy Supplements as part of their annual review of their Investment Policy Statements.

Fee Policy-Related Issues to Address When Reviewing and Amending Investment Policy Statements

The issues to be addressed when establishing a Fee Policy Supplement to an Investment Policy Statement include:

  • how to check and monitor the plan's systems for compliance with service provider regulations and participant disclosure regulations.  Who should be in charge of monitoring the systems?  How should the information received be recorded, digested and diligently applied? 
  • how to assess costs to be borne from plan assets:  from per-participant fees, asset-based fees, forfeited balances, transaction-based fees, etc.
  • how to allocate excess investment-related revenue:  to share among participants, or to allocate to plan expenses such as consulting fees and legal fees?
  • how to determine whether the fee structure of the investment menu causes inequities among plan participants.  If it causes inequities, how should these inequities be resolved?
    • For example, compare asset-based fees, which can advantage participants with lower balances, to per-participant fees, which can advantage participants with higher balances.  What is the best balance and what decision-making tools should be used to determine this balance?

A Fee Policy Supplement can provide a tool to facilitate decision-making in the context of ERISA's requirements.  It can provide a framework and structure to help plan sponsors document and understand which decisions need to be made and how to make them.  For example, it can steer plan sponsors away from making fee decisions in isolation based on the characteristics of a particular investment option, and assist them to making decisions in the context of all options and all legal requirements.  It can help demonstrate that fee decisions were made in the context of compliance with the DOL service provider regulations and participant disclosure regulations.  Most importantly, it can help to demonstrate compliance with ERISA's prudent process requirement and document a fair and reasonable basis for fee decision-making.