There are two separate, but related, new Department of Labor regulations regarding fee disclosure that will become effective soon: (1) vendor-to-plan disclosure and (2) plan-to-participant disclosure.  The DOL regulations have been finalized and compliance with the vendor-to-plan regulation is required no later than July 1, 2012.  In this alert, we discuss these regulations and provide action items for the immediate attention of retirement plan sponsors and vendors.

Vendor-To-Plan Disclosure

Vendors that serve as plan fiduciaries, registered investment advisors, recordkeepers or brokers, or that provide certain professional services for “indirect compensation,” are required to provide detailed fee-related disclosures to the plan fiduciaries responsible for selecting and monitoring them.

  • The initial vendor-to-plan disclosures must be provided to plan fiduciaries by July 1, 2012.  The disclosures must explain, in the manner set forth in the regulations, the fees to be charged and the services to be provided.  The disclosures must be made by July 1, 2012 for existing vendor contracts, and must be made in advance for new vendor contracts entered into on or after July 1, 2012.
  • While the vendor will be primarily responsible for drafting these disclosures, the plan fiduciary is obligated to ensure that it receives the disclosures.  If a plan fiduciary fails to receive the disclosures, the plan fiduciary is responsible for notifying the Department of Labor that a vendor has not provided the necessary disclosures.  The plan fiduciary will be deemed to have engaged in a “prohibited transaction” subject to excise taxes if the required steps are not taken.
  • The plan fiduciary is responsible for determining if total compensation received by a vendor is reasonable, and for understanding the relationships among vendors in order to identify conflicts of interest.
  • There is an exemption for pre-2009 403(b) funding vehicles that qualify for the Department of Labor’s existing exemption from Form 5500 reporting.

Plan-to-Participant Disclosures

Plan administrators of 401(k), 403(b) and other similar participant-directed plans are required to provide detailed fee-related disclosures to plan participants.

  • For most plans (including calendar-year plans and July 1 – June 30 plans), the initial annual plan-to-participant disclosures must be provided by August 30, 2012.  That means many plans will have only two months to put together written fee disclosures to participants reflecting information provided by the vendors (as late as June 30, 2012).  Moreover, the first quarterly disclosure of actual expenses charged to each participant will be due by November 14, 2012 for most plans.
  • The plan-to-participant disclosures must be provided to all eligible employees (regardless of actual participation).  For plans with a substantial number of employees who do not use employer-provided computers as an integral part of their jobs, there can be cost and/or logistical issues with distributing the disclosures.  

Action Items

  • For plan sponsors that have not yet started to work on compliance with these new requirements, now is the time.
  • Plan sponsors should contact their vendors to request (1) a draft of the initial vendor-to-plan disclosure document and a commitment regarding when the completed disclosures will be delivered, and (2) assistance from the vendor with drafting and distributing the plan-to-participant disclosures.  Plan sponsors need to build in enough time following receipt of the vendor-to-plan disclosures to prepare the initial plan-to-participant disclosures by the August 30th deadline.
  • Plan sponsors should consider how the plan-to-participant disclosures will be distributed.  This is especially true for plan sponsors with a substantial number of employees who do not use employer-provided computers as an integral part of their jobs.  Mail is acceptable, but can be costly.
  • If feasible, service agreements with vendors should be updated to provide that (1) vendors that are subject to the vendor-to-plan disclosure requirements will comply with their obligations, and (2) vendors will assist plan fiduciaries with drafting and distributing the plan-to-participant disclosures.
  • Plan sponsors should contact us for assistance with vendor discussions, review and customization of materials provided by vendors, and development of procedures for distributing the disclosures to participants.