New DOL Guidance Amplifies Participant Fee Disclosure Rules
Thursday, June 14, 2012

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. 


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