United States: New DOL Guidance Amplifies Participant Fee Disclosure Rules

For most defined contribution plans, initial annual fee disclosures are due to participants by August 30, 2012.  In order to facilitate compliance with the new fee disclosure rules, the U.S. Department of Labor recently issued Field Assistance Bulletin 2012-02, which provides helpful commentary on 38 common disclosure questions, including disclosure of administrative expenses and brokerage window fees.

As described in our November 5, 2010, newsletter, recent U.S. Department of Labor (DOL) regulations require plan administrators to make significant disclosures regarding plan fees to participants in 401(k), 403(b) and other defined contribution plans that have participant-directed investments.  For most plans, including calendar year plans, the initial annual disclosure is due to participants, beneficiaries and other eligible employees (collectively referred to in this article as "participants") by August 30, 2012.  To facilitate compliance with the fee disclosure rules, the DOL recently issued Field Assistance Bulletin 2012-02 (FAB 2012-02), which provides guidance on 38 FAQs.  This article summarizes the key points of FAB 2012-02, including some DOL positions that came as a surprise to plan administrators and practitioners. 

Administrative Expenses

The new DOL fee disclosure rules aim to provide participants with details about the administrative fees associated with their plan accounts.  Many participants are unaware of fees associated with their plan accounts or unable to determine how plan administrative fees are paid (e.g., by the plan sponsor, from a plan forfeiture account, from revenue sharing proceeds or directly from participants' accounts).  While the final DOL regulations require general disclosure of administrative fee information to participants, FAB 2012-02 clearly mandates certain specific disclosures.

  • Specificity of Administrative Fee Disclosure.  When administrative fees are payable from participant accounts, Q&A-5 requires plan administrators to disclose the type of administrative service (e.g., recordkeeping), the cost of the service (e.g., 0.12 percent of the participant's account balance, $25 per participant) and the plan's allocation method (e.g., pro rata, per capita).  Q&A-5 also specifies disclosure of the type and amount of administrative fees that are reasonably anticipated, but not yet known, and provides sample disclosure language.  However, Q&A-5 clarifies plan administrators are not required to provide fee estimates if the fee is expected to fluctuate from year to year.  In that case, a statement such as the following will suffice: If the plan incurs any legal expenses, such expenses will be paid from the plan's assets and deducted from individual plan accounts on a pro rata basis.  
  • Recordkeeping Fees Reduced by Revenue Sharing.  Q&A-6 addresses a common arrangement in which a plan sponsor negotiates a monthly recordkeeping fee (e.g., 2 basis points of plan assets) to be deducted from participant accounts, but the monthly fee is reduced by any revenue sharing proceeds from the plan's investment options.  Q&A-6 clarifies that such an arrangement must be disclosed to plan participants in the annual disclosure, even if the revenue sharing proceeds typically cover the administrative fees and no fees are actually deducted from participant accounts.

    The DOL offered the following sample disclosure to cover this type of arrangement: The plan incurs monthly recordkeeping expenses of up to .02% of the plan's assets.  These expenses typically will be deducted from your account on a pro rata basis.  However, these monthly expenses may be paid, in whole or in part, from revenue sharing payments that the plan receives from plan investment options.  In the past, these payments have completely paid for these recordkeeping expenses in some months.  If revenue sharing payments are received, the plan will pay less than .02% of the plan's assets per month, and only those expenses not offset by any revenue sharing payments will be deducted from your account. 
  • Negotiated Payment of Recordkeeping Fees with Revenue Sharing.  Q&A-11 addresses another typical arrangement in which the plan sponsor negotiates an agreement with the recordkeeper under which all administrative fees are paid from revenue sharing proceeds, and recordkeeping fees may not be deducted from individual participant accounts.  Q&A-11 clarifies this revenue sharing arrangement must be disclosed in the quarterly account statements issued to plan participants, even if there are no other administrative fees (such as individual loan fees, QDRO fees or legal fees) that were (or could be) charged against individual participant accounts.  Prior to FAB 2012-02, some plan administrators believed disclosure of revenue sharing arrangements was not required when no administrative fees were actually debited from participant accounts.  However, in making this clarification, the DOL reiterated its commitment to informing plan participants of the cost of plan participation, even if paid through investment-related charges. 
  • All Administrative Fees Paid from Plan Forfeiture Account or by Plan Sponsor.  Q&A-8 clarifies that if plan administrative fees are never deducted from participant accounts, the plan administrator need not disclose the amount and type of administrative fees payable from the plan's forfeiture account and/or the general assets of the plan sponsor—even if the plan document would permit payment of plan administrative expenses from individual participant accounts at the discretion of the plan administrator.  Note, however, that a plan administrator must disclose the use of revenue sharing proceeds to pay plan administrative fees in the quarterly statements, even if fees are never deducted from participant accounts.  
  • No Discretion to Report Recordkeeping Expenses Charged Against Individual Accounts as Part of Fund's Expense Ratio.  If a plan administrator pays recordkeeping expenses by liquidating shares from participant accounts, Q&A-9 clarifies this arrangement must be disclosed to participants as payment of administrative expenses from their individual plan accounts.  Incorporation and reporting of these recordkeeping expenses as part of the expense ratios of the plan's investment funds is not permitted, unless the fee is actually paid that way (e.g., using revenue sharing proceeds). 

Self-Directed Brokerage Accounts

Some plans provide brokerage windows, self-directed brokerage accounts or other similar arrangements (collectively referred to in this article as "SDBAs"), which provide participants with access to an array of investment options not otherwise available on the plan's menu of designated investment funds.  Investing through an SDBA is generally at the election of the participant.  While the final DOL regulations mandate disclosure of SDBA fee information, prior to the issuance of FAB 2012-02, many plan administrators and recordkeepers believed only minimal disclosures were necessary, as fee information varies greatly depending on the types of investments selected by a participant through the SDBA (if any).  Q&A-13 mandates disclosure of the following SDBA information:

  • General Description.  The plan administrator must provide all participants with a  description of the SDBA, including how to give investment instructions, any account balance requirements, any trading restrictions, how the SDBA differs from the plan's designated investment funds and who to contact with questions.
  • Fees and Expenses.  The plan administrator must provide an explanation of any fees and expenses that may be charged against the participant's individual account in connection with the SDBA, including any fees for opening and/or closing an SDBA, any ongoing maintenance fees, including inactivity fees and minimum balance fees, and any per-trade fees known by the plan administrator, including front- or back-end sales loads.  However, the DOL understands many per-trade fees will vary between investment options and may not even be known to the plan administrator.  Therefore, a general statement that such fees exist and may be charged against individual participant accounts, as well as directions on where to obtain more information about fees for a particular investment option, will satisfy the plan administrator's disclosure obligation.  This same statement should also advise participants to ask the SDBA provider about any fees, including any undisclosed fees associated with the purchase or sale of a particular security through the SDBA, before purchasing or selling such security.
  • Customized Fee Statement.  On a quarterly basis, the plan administrator must provide each participant who has an SDBA with a statement of the dollar amount of SDBA-related fees and expenses actually charged against his or her plan account during the preceding quarter, as well as a description of the services to which these fees relate. 

In addition, in Q&A-30, the DOL provided interesting commentary regarding its position on fiduciary oversight of SDBAs.  Historically, plan fiduciaries have taken a "hands off" approach to reviewing participants' investments and the associated fees under a plan's SDBA.  They generally take the position that they are responsible for the decision to offer an SDBA as part of a plan's overall investment menu, but not for monitoring the particular investment options participants select through the SDBA.  In Q&A-30, however, the DOL stated that "plan fiduciaries have a general duty of prudence to monitor a plan's investment menu," such that if "non-designated investment alternatives available under a plan are selected by significant numbers of participants and beneficiaries, an affirmative obligation arises on the part of the plan fiduciary to examine these alternatives and determine whether one or more such alternatives should be treated as designated for purposes of this regulation."  In other words, a plan administrator may need to make fee disclosures regarding an investment option that is only available through an SDBA if a significant number of participants elect to invest in that option.  (It is unclear whether the DOL also believes that the plan's fiduciaries must monitor such an SDBA investment option as if they had selected it for the plan's investment fund line-up.) 

This interpretation came as a surprise to plan administrators and practitioners, because it is inconsistent with prevailing interpretations of prior DOL guidance.  In addition, it seems overreaching by the DOL to establish new fiduciary oversight rules for SDBAs in a publication such as a Field Assistance Bulletin, instead of addressing this through a rulemaking process that would give interested parties an opportunity to comment.  Plan administrators of plans with SDBAs should consult with legal counsel to determine whether additional participant disclosures or any other actions are desirable in response to Q&A-30.

Other Items

FAB 2012-02 also provides guidance on the following issues:

  • Disclosure waivers for certain 403(b) plans (Q&A-2)
  • Utilization of a blended benchmark in the chart comparing the plan's investment-related information (Q&A-16)
  • Compliance alternatives for the mandatory disclosure website (Q&A-17–19)
  • Sample glossaries for investment terminology (Q&A-20)
  • Disclosures for a plan offering model investment portfolios (Q&A-28)
  • Disclosures for a plan offering a large number of registered mutual funds of multiple fund families (common with 403(b) plans) (Q&A-30)
  • Disclosure of total annual operating expenses for "fund-of-funds" investment options (Q&A-31) and stable value funds (Q&A-34)

Reminder of Compliance Deadlines

For calendar year plans, a plan administrator must provide participants with the plan's initial annual disclosure by August 30, 2012, and initial quarterly disclosures are due by November 14, 2012.  In addition, as required under Section 408(b)(2) of the Employee Retirement Income Security Act, plan administrators should expect to receive the required fee disclosures from covered service providers by July 1, 2012.  The DOL expects to issue a separate set of FAQs covering required disclosures by covered service providers in the near future.

Next Steps

Plan administrators should review their draft participant fee disclosures for compliance with FAB 2012-02.  Many plan administrators are revising their initial annual disclosures to address the requirements of FAB 2012-02.  Draft fee disclosure language for the quarterly statements should also be reviewed, as FAB 2012-02 requires more detailed disclosures than initially contemplated by the final regulations.  Plan administrators that have already distributed or finalized the initial disclosures should review the "Transition Relief" section below, as it discusses whether additional participant disclosures are required.

Transition Relief

The DOL recognizes some plan administrators have already issued initial annual fee disclosures (or finalized their draft disclosures to the point where modifications would be cumbersome).  Therefore, in the event that prior or forthcoming disclosures fail to comply with FAB 2012-02, the DOL will determine whether plan administrators have acted in good faith based on a reasonable interpretation of the final regulations.  So long as the plan administrator has acted in good faith and intends to comply with FAB 2012-02 in the future, the DOL does not expect to pursue an enforcement action against the plan administrator.  Therefore, assuming the plan administrator has made a good faith compliance effort, supplemental disclosures are not required.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions