What Employers Need To Know About The New Retirement Plan Fee And Expense Disclosure Rules

Two new retirement plan disclosure regulations effective early in 2012 will bring significant change to the retirement plan landscape. No later than May 31, 2012, retirement plan participants must be told something they never knew before, how much they pay each quarter for their 401(k) plan. A companion regulation is effective April 1, 2012 that requires retirement plan service providers to disclose fee information to employers and plan fiduciaries. Understanding and complying with these rules is critical for employers who are responsible for ensuring that retirement plan fees and expenses are reasonable. After receiving this information for the first time, employees are likely to ask questions of their employers and scrutinize the fees charged to them for services many employees believed were free.

The Employee Retirement Income Security Act of 1974 ("ERISA") requires employers and fiduciaries associated with 401(k) and other types of retirement plans to act solely in the interests of plan participants. Fiduciaries must act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting as a fiduciary and familiar with retirement plan matters would use to manage a retirement plan. As a result, fiduciaries must make a careful inquiry into the merits of any investment offered including consideration of all fees and expenses paid from plan assets because generally the higher the fees and expenses, the lower the return for participants' plan accounts. In order to assist fiduciaries and because of the perceived lack of lack of fee transparency of the financial services industry especially in bundled arrangements in which administrative costs were not made explicit, the United States Department of Labor issued disclosure regulations under Section 408(b)(2) of ERISA. As would be expected, the idea of fully disclosing fees, expenses and conflicts of interest met with considerable opposition from industry groups. Nevertheless, the new 408(b)(2) regulations require plan service providers to disclose comprehensive information to employers about the compensation they receive both directly and indirectly as well as whether services are being provided as an ERISA fiduciary. Service providers required to make disclosures include providers of banking, consulting, custodial, insurance, investment advisory or management, recordkeeping, securities brokerage, or third party administration services; or...