Why 401(k) Plan Fee Disclosures Matter

Mark Twain said, “Supposing is good, but finding out is better.” When it comes to fees employers pay on qualified retirement plans, the U.S. Department of Labor (DOL) wants employers to maintain documentation regarding certain transactions related to retirement plans administration. In fact, the DOL’s Employee Benefits Security Administration (EBSA) is studying disclosures currently required under law and planning for additional regulations to make these disclosures more easily understood.

On September 19, 2014, Kristen Zarenko, Senior Law Specialist of EBSA’s Office of Regulations and Interpretations, described issues surrounding fee disclosure as a top priority at EBSA. In speaking at the 2014 Washington Update presented by the New England Employee Benefits Council, she noted that EBSA enforcement actions will continue to require plan sponsors to provide copies of annual fee disclosures from covered service providers. Zarenko also observed that a surprisingly large number of plan sponsors have not been able produce the required documents during the first two years of enforcement.

Disclosures under current regulations

EBSA has implemented both internal and external methods to study actual disclosures required for over a year under the Employee Retirement Income Security Act (ERISA) § 408(b)(2). First, internal weekly enforcement activity is being undertaken to review a sample of disclosures from 2013, where an EBSA working group is collecting samples from the field and ranking the results. Desirable “A” level disclosures are those easy for fiduciaries (plan sponsors) to understand. At the other end of the spectrum are disclosures which are nearly impossible to understand; such difficult to understand disclosures are likely to be addressed with future guidance intended to weed them out.

EBSA has also contracted with an independent third party who will perform focus group studies of plan sponsors in all regions. This project in particular seeks to increase understanding the needs of those sponsoring small plans. Some large plans will also be included in the sample for this independent study. It is hoped that the successful implementation of disclosures for large plans will provide useful concepts to improve the processes applied to smaller plans.

Additional regulations

The EBSA semiannual regulatory agenda continues to give high rank to establishing a guide or summary to improve the quality of disclosures received by plan fiduciaries. Ultimately, the purpose of such a guide or summary is to assist fiduciaries, particularly those of small- and medium-sized plans, in identifying and understanding complex disclosure documents. Understanding fee disclosures is essential for fiduciaries to be able to collaborate with advisors to establish reasonable service agreements.

ERISA requires plan fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries. This includes more than selecting appropriate service providers and investments; arrangements must be monitored continuously to establish that reasonable compensation is paid. When facing investigators from EBSA, plan sponsors will be in an unenviable position if lacking necessary documentation to establish the amount and justification for direct and indirect compensation payments.

Anticipate EBSA enforcement

In addition to its efforts to study the quality of disclosures being made to plan sponsors, other EBSA enforcement activity will continue. EBSA enforcement actions will continue to require that plan sponsors submit copies of annual disclosures from covered service providers. This may include documentation as to how the fiduciaries analyzed the fee disclosures. Additionally, plans with participant directed balances, must be prepared to present copies of annual disclosures to participants, and copies of quarterly actual fee disclosures from the quarterly statements provided to participants.

ThinkHR will continue to monitor and report on regulations as they apply to disclosures under § 408(b)(2).

For additional information, see http://www.dol.gov/opa/media/press/ebsa/EBSA20140361.htm.