Fee Disclosures in Qualified Retirement Plans

Ginny Gribble, Director of Retirement Plan Services   email | bio
May 2011

The IRS has issued several sets of regulations over the past three to four years related to fee and service disclosures to both plan sponsors and plan participants.  If you have a large plan (generally more than 100 eligible employees), you have seen some of this already in the 2009 revised and lengthened Schedule C attachment to your Form 5500.  Effective for plan years beginning on or after November 1, 2011 (so for 2012 calendar year plans), the regulations also require certain disclosures to participants.

 As background, ERISA states that receiving a fee for services to a retirement plan is a prohibited transaction.  Of course, no one is going to provide services for free, so an exemption from this prohibited transaction was issued that allows fees between a "covered plan" and a "covered services provider" as long as "no more than reasonable compensation is paid."  The new regulations state that no contract or arrangement for services is reasonable unless certain fee disclosures are made. 

A "covered retirement plan" is a retirement plan subject to ERISA; it would include plans such as 401(k), profit-sharing, defined benefit and many 403(b) plans.  It does not include IRA arrangements (IRAs, SEPs, SIMPLEs, etc.), or welfare benefit plans.

"Covered services" are broad and include, but are not limited to, fiduciary services, certain recordkeeping and brokerage services, auditing, actuarial, third-party administration (TPA), custodial, investment advisory, legal and consulting services.  If fees for such services are paid directly by the company sponsoring the plan, there is no issue.  The fee disclosure regulations apply when the service provider receives either direct or indirect compensation for its services. 

"Direct compensation" is direct service fees that are charged to the plan and deducted from plan assets.  These could include plan administration/TPA fees, actuarial fees or fees to conduct the annual plan audit.  "Indirect compensation" is compensation not paid directly by the plan, but received by the service provider from other sources such as investment funds.  Indirect compensation includes items such as 12b-1 fees, revenue sharing and commissions.  Direct compensation tends to be a stated dollar amount, whereas indirect compensation is often a percentage of the investment funds or total plan assets or based on a formula that derives a percentage. 

At the plan sponsor/employer level, service providers are required by the new regulations to disclose all services to be performed and all direct and indirect compensation, including fees that will be charged for termination of services.  This is often done through contracts and/or service agreements.

The new participant disclosure regulations apply to ERISA-covered participant-directed individual account plans, so not to trustee-directed 401(k) or profit-sharing plans or to defined benefit plans.  They do apply to ERISA-covered 403(b) plans.  Initially, before an employee is eligible to choose his first investment, and annually thereafter, information that must be disclosed to participants includes the right to direct, any investment restrictions, and the fees and expenses associated with investing.  Historical performance of the plan's investment options and comparison information to benchmark similar funds is also required to be disclosed annually. 

Certain fee disclosures are required to be provided at least quarterly.  These would basically be the dollar amount for administrative services actually charged to the participant's account during the quarter, including any individual expenses such as fees for loan processing or taking a hardship withdrawal.

The regulations state that the responsible party for providing all of this is the named plan administrator, which is generally the employer.  However, service providers are working diligently to assist by creating notices and enhancing participant statements to include the required information.  What should you do right now?  If your providers have not already contacted you, contact them and find out what they are going to be able to provide that will help you comply with the regulations.  As with other recent participant disclosure requirements (QDIA notices, automatic enrollment notices, etc.), most service providers will be ready to assist when the time comes.

If you have questions or would like more information, please contact Ginny Gribble (262/754-9400).