Fee disclosure information
In recent years, the U.S. Department of Labor (DOL) has released significant updates to regulations of fee disclosures to plan sponsors and plan participants. These updated regulations included new disclosure requirements that apply only for qualified plans that are subject to Title I of Employee Retirement Income Security Act of 1974 (ERISA).
How to determine if these regulations apply
If your plan is not subject to Title I of ERISA, these disclosure requirements do not apply.
In general, ERISA applies only to qualified plans that cover employees beyond the owners of the business sponsoring the plan (or their spouses). So, if a retirement plan covers only owners of the business (where the owners and/or their spouses are the only participants in the plan), the plan is NOT generally subject to Title I of ERISA.
For example, a retirement plan where only a sole proprietor or only partners are covered by the plan will not be subject to Title I. However, a retirement plan under which one or more “common law” employees are covered plan participants will generally be subject to Title I.
Note that an individual and his or her spouse shall not be considered employees with respect to a trade or business (incorporated or unincorporated) owned by that individual (or by the individual and his or her spouse). For example, a partner in a partnership and his or her spouse shall not be deemed to be employees with respect to the partnership.
Summary and full text of regulations
Summary for providers
Let’s help you, as a plan sponsor, understand the disclosures that providers (including Fidelity) are required to make to you.
The new regulation requires these service providers to disclose to the plan sponsor fiduciary information about:
- The services to be performed
- The fees and compensation to be received
The intent of the regulation is to make it easier for plan fiduciaries to assess the reasonableness of the fees paid to service providers and to highlight potential conflicts of interest that could affect the service provider's delivery of services and performance.
Here are some key features of the new rules:
Plans subject to disclosure requirement: The regulation applies only to retirement plans, both defined contribution (DC) and defined benefit (DB), covered by ERISA. Plans that do not have any common law employees, or owner-only plans are excluded from the regulations. IRAs, SEPs and SIMPLE IRAs are specifically excluded. Welfare plans are also excluded, but may be considered at a later date.
Disclosure requirement: Certain service providers, such as Fidelity, must disclose the services being performed and the direct or indirect compensation that is being received. This would include compensation such as consulting fees, brokerage fees, transfer fees, and 12b-1 fees. Compensation also includes compensation received by an affiliate or subcontractor of the provider. Where there is no explicit fee, the service provider must provide a reasonable and good faith estimate of the cost to the plan for the services being provided.
How the information will be disclosed: The compensation can be expressed as a dollar amount, a formula, a percentage of plan assets, or as a per participant charge. The regulation does not require that the disclosure be made part of the vendor contract; it does, however, mandate that the disclosure, in the case of a new client, be made prior to the execution of a service provider arrangement. The regulation does not specifically address the electronic delivery of the information.
Additional requirement for DC recordkeepers: In addition to information about its own compensation, a recordkeeper of a participant-directed DC plan must disclose, for all designated investment options on its platform, the expense ratio and annual operating expenses of the fund or product. Self-directed brokerage windows are excluded from this requirement, but the broker must still disclose compensation received in connection with self-directed brokerage investments. The recordkeeper may forward the prospectuses of unaffiliated mutual funds to satisfy the disclosure requirement for such funds.
Changes to disclosure: The service provider is also charged with disclosing a change to the initial disclosure no later than 60 days from the date the provider is informed of the change.
Failure to comply: If a service provider fails to comply, the service provider would be subject to an excise tax penalty. Importantly, the rule provides relief to a plan sponsor who unknowingly enters into a service contract with a provider that has not satisfied the disclosure. Service providers are also permitted to fix errors or omissions made in good faith.
New and existing clients: The service provider will have to comply with the regulation for all clients no later than July 1, 2012, and provide existing clients with updated disclosure on or before that date.
Summary for plan sponsors
The new regulation requires you, as a plan sponsor, to provide participants and beneficiaries with:
- Certain plan information and related fees
- Plan investment options, in a comparative format
By establishing a mandatory, uniform set of disclosure rules, the DOL hopes to ensure that all participants have access to the information they need to make informed decisions regarding management of their plan accounts and investment of their retirement savings.
- Initial disclosures to participants (both existing and newly eligible) must be furnished no later than either 60 days after the plan's applicability date or 60 days after the effective date of the DOL service provider fee disclosure regulation under ERISA 408(b)(2).
- The rule is applicable for plan years beginning on or after November 1, 2011. By coordinating the transition rule with the 408(b)(2) effective date, the DOL intends to allow all plan fiduciaries to receive required disclosures from service providers prior to having to send notices to participants. The DOL also clarified that the first quarterly disclosures under the regulation should be provided 45 days after the quarter in which the initial disclosures have been made.
Plans subject to disclosure requirements: The final regulation applies only to retirement plans, both defined contribution (DC) and defined benefit (DB), covered by ERISA. Plans that do not have any common law employees, or owner-only plans, are excluded from the regulations. IRAs, SEPs and SIMPLE IRAs are specifically excluded. Welfare plans are also excluded, but may be considered at a later date.
Who is required to disclose: Plan administrators; who may delegate the responsibilities to another individual or entity.
What needs to be disclosed: Generally, two broad types of information: (1) plan information, including administrative and individual expenses that may be charged against an individual's account; and (2) investment-related information for the plan's designated investment alternatives. Additional information must be available upon request. Self-directed brokerage accounts were excluded from the regulations for investment-related information.
Who needs to receive the disclosures and when: Participants and beneficiaries who have the ability to direct the investment of their accounts. Generally, the disclosures need to be provided prior to when an individual can first provide investment direction and annually thereafter. In addition, certain fees actually charged to a participant's account must be reported quarterly.
Format in which the information must be disclosed: There is no required format for the plan information. However, investment-related information must be provided in a format that facilitates comparison. The DOL has issued a model chart which may be used for this purpose.
Penalties for non-compliance: The disclosure requirements are a fiduciary obligation and there are no specific monetary penalties for failing to provide notices as there are with other ERISA-required disclosures. However, failure to meet the requirements could be considered a breach of fiduciary duty, exposing plan administrators to remedies under ERISA.