News & Resources
Viewpoint: DOL Coordinates Disclosure Deadlines—The Cart Before the Horse No Longer
On July 13, 2011, the U.S. Department of Labor (DOL) announced the extension of the fiduciary-level fee disclosure regulation issued under section 408(b)(2) of the Employee Retirement Income Security Act (ERISA). The new effective date is April 1, 2012, revised from Jan.1, 2012. The department's final rule, published in the July 19, 2011Federal Register, allows for coordination of the participant-level fee disclosure with the plan-level requirements under ERISA section 404(a)(5). (To learn more, see the SHRM Online article "DOL Aligns Deadlines for Retirement Plan Fee Disclosures.")
Although complete transparency and fee disclosure are necessary in the world of corporate retirement plans, this delay is warranted and creates uniformity and logistical sense in the final regulations. Prior to this reprieve, plan sponsors could have been required to disclose participant-level fees on quarterly statements before the effective date of regulations granting them full knowledge of the fees at the plan level.
In other words, plan sponsors would have been required to disclose fees to participants without complete knowledge and understanding of fees at the plan level; that disclosure hierarchy wasn’t logical. With the revised delay, plan-level fees are required to be disclosed no later than April 1, 2012, with the initial participant-level fees to follow no later than 60 days from that date.
The goal of such disclosure is to help plan sponsors and participants recognize and understand the fees and expenses associated with the plan administration at plan and participant levels. Just as consumers demand to know what they pay for all goods and services, plans sponsors and participants should enjoy the same privilege. Additionally, as fiduciaries, plan sponsors have a legal duty and obligation to determine the reasonableness of plan expenses.
According to an AARP survey released in March 2011, when plan participants were asked whether they pay fees for their 401(k) plan, 71 percent reported that they paid no fees (a mistaken view, since at the very least their investment funds charged annual expense fees). This data is in contrast to a 2011 Transamerica study indicating over three-quarters (78 percent) of employers are likely to believe their employees have a clear understanding of the fees associated with participating in the retirement plan. Obviously, there is a major disconnect between these two groups’ views on fees.
Perception is reality, and in this case participants’ perceptions are going to change with the new disclosure, followed by inquires to HR departments from curious and confused participants about their “new” fees.
Consumers Demand Value
Once aware of the participant-level costs, participants are likely to inquire about the value and services received in exchange for the fees paid. Undoubtedly it will lead to further scrutiny of those expenses. Included in the plan-level notice requirement is an investment benchmark requirement to illustrate the competitiveness of the investment menu offered—including performance figures and the annual operating costs of the funds expressed as a percentage and as a dollar amount for each $1,000 invested. This will certainly raise a lot of eyebrows.
When this information is disclosed to employees, their reactions will vary. They might side with the “they were hiding this all along” camp or with the “I knew this all along” camp. Given the aforementioned AARP statistics, they likely will be in the former camp. There might be a sense of distrust or animosity toward these figures and information.
The best way to approach this is to get ahead of the curve. If they are not already doing so, plan sponsors should institute an aggressive educational campaign discussing the current fees, upcoming disclosure and changes that participants will see on their statements and literature will. If plan sponsors have been communicating clearly about fees prior to the disclosure requirement, employees might see the new disclosure as proof of the integrity and candor of management.
There will be significant headaches for those consultants and plan sponsors that did not implement quality control procedures. In addition, there will be questions asked of those that did have a process in place. However, it is obvious which camp we want to be in, and now is the time to act in preparation for such transparency.
ERISA does not mandate that plans select funds with the lowest feesnor does it require plan sponsors to have a sense of clairvoyance.However, costs should be justified and in line with the services rendered by the vendor and/or plan consultant and reviewed periodically. For example, consultants that provide co-fiduciary services, educational presentations and custom target-date funds and that conduct quarterly investment committee reviews can warrant a larger fee than those that help with enrollment and then disappear. These are the types of justifications plan sponsors need to prepare for regarding services and fees in the face of the looming disclosure deadline.
ERISA requires plan sponsors to identify all “return-reducing” expenses and to ensure that these costs are reasonable. An ideal preparation strategy is to benchmark plan expenses, including mutual fund costs and insurance wrap fees, against industry and peer groups to determine reasonableness. In the words of the late Peter Drucker, "What gets measured, gets managed." What better way to measure the success of the plan and the competitiveness and reasonableness of the fees and performance by benchmarking the plan against its peers? A benchmark analysis is an easy and inexpensive way of fulfilling one’s fiduciary duties.