Fee Disclosure Issues Front And Center For 2012

The Employee Benefits Security Administration (EBSA) continues to focus on developing and expanding the scope of the fiduciary requirements under the Employee Retirement Income Security Act (ERISA), especially the fee disclosure requirements. Last year was busy for the EBSA, and 2012 looks like it will be just as eventful.

In the past 12 months, EBSA took the following actions:

• Issued final regulation for service provider disclosures and effective dates for participant fee disclosures, and extended deadline for service provider disclosures to July 1, 2012 — Feb. 2, 2012
• Revised the technical release (issued in September) regarding electronic participant fee disclosures — Dec. 8, 2011
• Issued final regulation on requirements for prohibited transaction exemption for providing investment advice to plan participants — Oct. 24, 2011
• Announced it will "repropose" its rule expanding the definition of fiduciary related to providing investment advice — Sept. 19, 2011
• Issued technical guidance on electronic means for meeting the participant fee disclosure requirements — Sept. 13, 2011
• Delayed (until April 1, 2012) the effective dates for participant fee disclosures and service provider disclosures — July 13, 2011
• Announced alignment of service provider disclosure and participant fee disclosure effective dates — May 31, 2011

EBSA has also announced that it hopes to reissue the regulation it rescinded in September (regarding the definition of fiduciary) in May 2012.

Challenges for 2012

The main challenge that plan sponsors and fiduciaries face this year is implementing the procedures necessary to comply with the final regulations regarding participant fee disclosures and service provider disclosures before the July 1 effective date. The new service provider rules apply to existing contracts and contracts entered into after July 1, 2012. The service provider disclosure rules specify the disclosures that certain service providers must provide to the plan, and failure to provide them will result in the contract's being treated as a prohibited transaction. So, plan fiduciaries must ensure that the plan's service providers are in compliance. Further, without the service providers' meeting their disclosure obligations, the plan cannot properly comply with the participant fee disclosure requirements.

The service provider disclosure requirements apply to any provider of services to an ERISA-covered plan who expects to receive $1,000 or more in compensation for providing certain types of services such as fiduciary or investment adviser, recordkeeping, brokerage, accounting, actuarial, appraisal or valuation, legal, custodial, insurance or banking. A covered service provider must disclose in writing the following information to a "responsible plan fiduciary" (i.e., a fiduciary with authority to enter into, extend or terminate a contract):

• A description of the services being provided
• The status of the service provider as a fiduciary or investment adviser
• A description of the compensation expected to be received (either in total or by service), either directly or indirectly, and including amounts received from related parties, and including any amount payable in the event of the termination of the contract
• For recordkeeping services, a description of all direct or indirect compensation for such services; however, if fees for such services are wholly or partially offset based on other compensation received by the recordkeeper, an estimate of the cost and description of the covered services must be provided
• For investment services, a description of any compensation that will be charged directly against an investment (such as commissions, sales loads and charges, redemption fees or account fees), and a description of the annual expenses and any ongoing expenses (such as wrap fees, mortality and expense fees)
• A description of the manner in which the compensation will be received by the service provider (i.e., billed to the plan or deducted directly from a plan account or investment

With this information in hand, the responsible plan fiduciary is in a position to evaluate the level of fees and compensation being paid for services rendered to the plan. Also, the plan administrator of any individual account plan with participant-directed investments is then able to make the necessary disclosures to the plan participants. The required disclosures to the plan participants are complicated and extensive, but generally fall under the following two categories:

1. Plan-related information — Plan-related information must be provided automatically on or before the date on which participants can first direct their investments, must describe how participants give investment instructions and any applicable limitations and must describe designated investment alternatives and investment managers. Also, information must be provided at least quarterly regarding plan-related expenses charged against the participant's account and individual expenses and the services to which they relate.
2. Investment-related information — Investment-related information must also be provided on or before participants can direct their investments and quarterly thereafter, and must meet the following requirements:

• List each investment alternative and the category of investment
• For fixed-rate investments, list the stated rate of return and the term of the investment and any minimum guaranteed rate, and indicate if the rate can be changed prospectively by the issuer and how to obtain information about the current rate
• For investments with no fixed rate of return, list the average annual total return for the most recent one-, five-, and 10-year periods (or the life of the investment if less), and include the same information for a comparable market index
• List fee information, including amount and type of fees (e.g., commissions and sales loads), total operating expenses as a percentage, total operating expenses as a dollar amount per $1,000 investment, any transfer or withdrawal fees, and the name of the Internet address where information on the investment can be obtained

This information should be provided in a tabular format for ease of comparison among investment alternatives.

Clearly, these disclosure requirements are extensive and complicated, and plan fiduciaries can expect to be busy gathering the required information to prepare the necessary disclosures in the months leading up to the July 1, 2012, effective date.

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.