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Participant Fee Disclosure: Top 10 List of Issues to Consider

The new 401(k) participant fee disclosure rules issued by the U.S. Department of Labor require plan administrators with calendar year plans to send disclosures to plan participants by August 30, 2012. The top 10 things to consider in complying with the new rules are described in this publication in Q&A format.

The U.S. Department of Labor’s (DOL) new 401(k) participant fee disclosure rules are final, and they require plan administrators with calendar year plans to send disclosures to plan participants by August 30, 2012.  The Q&As below describe 10 things you should consider as you comply with the new rules.

Q: What are the required disclosures?

A: The required disclosures are intended to answer the question “How much am I paying for my 401(k) plan?” and they include both participant-level disclosures and plan-sponsor-level disclosures.  Providing the participant-level disclosures is the fiduciary responsibility of plan administrators, and while some plan sponsors are preparing their own participant-level disclosures, most are relying on their 401(k) vendors to prepare the participant-level disclosures for them.  In contrast, plan-sponsor-level disclosures were due to be sent from your vendors to you by June 30 and do not need to be furnished to plan participants.  The plan-sponsor-level disclosures give plan sponsors additional information about plan fees that participants do not receive, such as the cost to terminate the contract, the types of direct and indirect compensation the vendor receives from the plan or third parties, and the location of that information in the vendor’s master services agreement with your company, etc.  If you have not yet done so, it is a good idea to send letters to all of your 401(k) plan’s service providers/vendors, including plan record-keepers, trustees, brokers and investment advisers, to notify them of your expectation that you will receive the required disclosures.

Q: Can I rely on the disclosures given to me by my vendors?

A: No.  Providing participant-level fee disclosures is a plan sponsor’s fiduciary responsibility under the Employee Retirement Income Security Act, so you should carefully review your vendors’ participant-level fee disclosures.  The disclosures require both quantitative information and narrative descriptions of various plan features and expenses.  The DOL regulations allow plan sponsors to rely in good faith on the disclosures that are given to them by their vendors, and while this may protect you from having to question details for which you have no other source of information (for example, dollar amounts of expenses, etc.), it is likely that the good faith standard will not protect you from liability for sending out erroneous or overly vague information without review.  As a result, you should consider whether to provide supplementary disclosures to wrap around your vendors’ template disclosures in order to protect yourself from fiduciary liability.

Q: What if the disclosures have gone out to my plan participants already?

A: Some vendors have already sent out the participant-level disclosures directly to participants, without waiting for affirmative approval from plan sponsors.  If this happened to you, you should get a copy of the disclosures and review them so that you can be prepared to answer participant questions (see Q&A 4 below).  You might not be able to change what has been sent out, but you can be prepared to respond to participant feedback.  You should also consider whether you need to supplement your vendors’ disclosures.

Q: Will plan participants have questions and concerns about the disclosures?

A: The participant-level fee disclosures required by the new regulations are extremely long and detailed, especially for plans with numerous investment options.  Some plan sponsors predict they will be inundated with questions from participants after receiving the disclosures.  Others believe that participants will be so confused that they will not ask any questions at all.  We think the outcome will likely depend on your particular plan’s participant makeup.  Also, as you may know, your record-keeper now must give you an estimate of what the fees are for simply record-keeping your 401(k) plan, even if those fees are completely offset by revenue sharing payments.  You should review all disclosures and try to anticipate participant questions such as “I always thought that investing in my 401(k) plan was free, but now I see that there are administrative fees?” or “What are ‘revenue sharing payments’?”  You may want to consider providing training on the disclosures for any Benefits staff (or call center representatives) who might be asked about the disclosures by participants.

Q: Who is required to receive the new disclosures, and how?

A: You must provide the disclosures to all eligible employees, including new hires and those employees who are eligible for but not participating in the plan.  If you plan to distribute the fee disclosures electronically, make sure to review the DOL’s new rules that specifically address how electronic disclosure requirements apply to the new participant-level fee disclosures. (View DOL Issues Electronic Guidelines for New 2012 Participant Investment and Fee Disclosures for more information.)

Q: What should I do if the “benchmark” for a particular investment option that vendors are using for the participant fee disclosures is different from the benchmark used for that option in my plan’s Investment Guidelines?

A: If your 401(k) plan’s Investment Guidelines are shared with participants, you should review the benchmarks for any discrepancies and be prepared to explain them to your participants.  You should also consider the implications of these “dueling benchmarks” to your Investment Guidelines at your next 401(k) Committee meeting.

Q: Do I have to provide fee disclosure information for all of the investment options in my plan, including “brokerage windows” or “mutual fund windows” and company stock funds?

A: You need to provide the full DOL fee disclosures for your designated investment alternatives (DIAs), but not all of your investment options may constitute DIAs.  If your 401(k) plan offers a “brokerage window,” you should be aware that there are separate reporting requirements for brokerage windows and similar arrangements.  If your plan offers a company stock fund, you should check the disclosure requirements carefully and give special consideration to the benchmark you will use for the fund.

Q: What should I do with the plan-sponsor-level disclosures I received from my 401(k) plan vendors?

A: Once you receive the fee disclosure statement from your vendors, your 401(k) committee should discuss the disclosed fees, consider whether they are “reasonable” and assess whether there are any conflicts of interest.  In some cases it may be prudent to benchmark the fees to confirm they are reasonable in the current marketplace.  You may need to consider whether it is necessary to do a formal request for information or request for proposal to assess the fees paid by the plan.

Q: Will the new rules affect my other plan documents?

A: If your contract or agreement with your vendors/service providers is more than a year or two old, you should consider updating it so that your vendor affirmatively agrees to provide the fee disclosures required, along with other representations they need to make.  It is also a good idea to review your plan’s Investment Guidelines or policy, your summary plan description and your plan and trust documents to see if any updates are needed.

Q: Are there new disclosure rules that apply to quarterly participant account statements?

A: Yes.  The DOL has also issued new rules for what must be disclosed in participants’ quarterly account statements.  Drafts of the new quarterly statements should be coming from your vendors soon and should be reviewed for compliance with the new rules.  The new quarterly statements are required beginning in the third quarter of 2012 (but no later than November 14, 2012).

© 2022 McDermott Will & EmeryNational Law Review, Volume II, Number 201
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About this Author

Associate

Lisa Loesel focuses her practice on employee benefits matters, including the design, amendment and administration of pension and 401(k) plans, nonqualified deferred compensation arrangements, and employee stock ownership plans. She counsels privately and publicly held corporations regarding the employee benefits design and transition matters arising from corporate mergers, acquisitions and divestitures. She also advises clients regarding fiduciary and plan investment issues under the Employee Retirement Income Security Act of 1974 (ERISA). Lisa also has experience counseling plan...

312-984-7608
Todd A. Solomon apension 401k attroney  McDermott Will & Emery LLP, Chcago
Partner

Todd A. Solomon is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office.  Todd focuses his practice primarily on designing, amending, and administering pension plans, profit sharing plans, 401(k) plans, employee stock ownership plans, 403(b) plans, and nonqualified deferred compensation arrangements.  He also counsels privately and publicly held corporations and tax-exempt entities regarding fiduciary issues under ERISA, employee benefits issues involved in corporate transactions, executive compensation matters, and the implementation of...

312-984-7513
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