The Big Picture
The DOL is well intentioned in its fight against the high fees and
lack of transparency in retirement plans. To better understand
this, we must first understand the magnitude of fees that can be
charged to a participant’s account. This is integral to the health
of the private retirement system, as the DOL has concluded that
1 percent in fees reduces a participant’s accumulated retirement savings by 28 percent over an average working career.²
With total plan fees ranging from less than 1 percent to several
percent annually, plan fiduciaries and participants alike must
gain a better understanding of fees to prevent an economic
catastrophe in the coming decades.
Generally speaking, there are two kinds of fees charged to accounts: investment-related fees and plan-related fees. Participants
can, and often do, incur both kinds of fees. Investment-related
fees include fund management expenses, revenue sharing payments, wrap fees, mortality and expense charges, custodial fees,
and trading expenses, to name a few. Plan-related fees are related
to the costs of the ongoing management of the plan, including
annual administration and compliance testing, government-mandated reporting, recordkeeping services, website maintenance, auditing, and consulting services. Even if the fees for
those services are de minimus on a standalone basis, they can
create an aggregate cost structure that is extremely unfavorable
to the average worker.
… the Dol has concluded that 1 percent
in fees reduces a participant’s
accumulated retirement savings
by 28 percent over an average
working career.
ERISA already contains a mandate that plan fiduciaries monitor the fees to ensure they are reasonable and necessary for the
proper operation of the plan.³ What ERISA lacks is clarification
as to what it means for a fee to be reasonable or for a service to
be necessary. It’s not uncommon to stumble across two plans
with nearly identical services but dramatically divergent cost
structures. Many of us participate in retirement plans ourselves.
What services do you believe are necessary? What annual expenses do you think should be your shared responsibility? As
we enter this new world of fee disclosure and enhanced transparency, sponsors will be required to know what fees are paid
for services and to provide detailed information on those fees
to participants, along with offering a reporting mechanism for
participants to verify that plan-related expenses charged to their
accounts align with the previously disclosed costs.
Who Is Affected?
The new fee disclosures do not apply to all retirement plans,
but rather only individual account plans4 where the participant/
beneficiary is the party responsible for directing his or her
investments. This generally takes the form of a 401(k) plan
or 403(b) plan, but there are other types of plans included in
this definition such as money purchase plans, employee stock
ownership plans (ESOP), stock bonus plans, and thrift plans,
IRA-based plans such as SIMPLE IRAs, and simplified employee
pensions (SEPs). Non-ERISA 403(b) plans and government
plans are also exempt from this rule.
Under prior guidance, fee and expense information was
explicitly required to be provided to participants only if the plan
intended to qualify for the safe harbor under ERISA Section
404(c) to limit its responsibility for participants’ investment
decisions. This new rule extends beyond this scope and applies
to all individual account plans affording participants the right
to direct their own investments. To a great extent, this rule
erases the distinction between a plan intending to comply with
the 404(c) safe harbor and all other individual account plans.
Individual account plans where the investments are not directed
by participants would not be affected by the rule.
These disclosures must be made for all plan years beginning on or after November 1, 2011. For calendar year plans,
which make up a vast majority of the qualified plan universe,
the first year for which participants must receive a compliant
fee disclosure will be the 2012 plan year. The responsibility for
disclosing fee information lies with the plan administrator, 5
but providers will play a significant role in compiling fees for
most plans and, in many instances, create the disclosures for the
plan administrator. Plan administrators were provided a safe
harbor under the rule, so they will not be held responsible for
inaccurate or incomplete fee disclosure, provided the reported
fees were believed to be true based on the administrators’ diligent review of provider information. Compliance with this rule
does not exempt plan fiduciaries from their duty to prudently
select and monitor plan service providers or the investments
offered under the plan.
Disclose What?
The rule split the disclosure into two main categories: plan-related information and investment-related information. Each
of these categories has several subcategories and the participants
will receive comprehensive information regarding fees and
expenses that may affect their account balances inside the plan.
Plan-related Information
As you might expect, participants will receive general plan
information on the structure and mechanics of the plan, any
administrative expenses, and any fees that could result from the
participant engaging in an elective transaction or activity. Most
of the information in this section will not be new to participants, with many plans already intending to meet the criteria
of ERISA Section 404(c), but the level of detail required under
the rule should heighten awareness of overall fees, something
that has been substantially absent from information previously
