New rules require disclosures about fees under US tax-qualified retirement plans by both service providers to plans and plan sponsors.
US tax-qualified plans may only pay “reasonable compensation” for services. If the plan pays more than reasonable compensation, there may be a “prohibited transaction” creating fiduciary liability and resulting in excise taxes. Accordingly, plans must be able to determine what services they are purchasing and the fees being paid for those services. However, many plans receive service under “bundled” arrangements, in which services and fees are not specified. For example, a mutual fund company and its affiliates may provide investment services, recordkeeping and trustee services for one fee.
Effective July 1, 2012, most service providers will be required to report to plan sponsors the details of the services provided, how they are compensated and whether there are any potential conflicts of interest. Both direct and indirect compensation (where a party other than the plan or the plan sponsor pays the service provider) must be disclosed. In the case of indirect compensation, the ultimate payer for the services must be listed. Plan sponsors must, then, consider all of this information in their selection and subsequent retention of service providers.
Plan sponsors are similarly required to disclose to plan participants the types and amounts of fees that are charged, as well as information about making investment elections. This includes certain information required to be disclosed annually (no later than August 30, 2012 for calendar year plans). Other information must be disclosed quarterly, starting with the third quarter of 2012. Plan sponsors should coordinate with their service providers to ensure that these disclosure rules and deadlines are met.