As of July 1st 2012, the Department of Labor (DOL) requires service providers to disclose all direct and indirect fees associated with the management of 401 (K) retirement plans. The DOL’s intent for the implementation of the fee disclosure rules is to provide investors (employees) with a breakdown of fees as well as to encourage employers who sponsor these plans to “shop” around for service providers and compare costs.
The Employee Benefits Security Administration (EBSA, a division of the DOL responsible for overseeing protection of employee rights regarding pension plans) first proposed the new disclosure rules as part of the Employee Retirement Income Security Act (ERISA). The EBSA recognized the need for transparency of fees and expenses in employer-sponsored 401 (k) plans following the recession and decline in retirement investment in 2010. Efforts to make fees and expenses transparent heightened after a series of class-action lawsuits were filed against large employers, alleging violation of fiduciary duties for undisclosed fees and excessive charges. As a result, the DOL enacted the new disclosure rules in April 2012, but decided to postpone the implementation date to July 2012 to allow service providers time to seek compliance.
Service providers must furnish documentation on:
- Administrative fees and expenses;
- Individual fees and expenses;
- Performance data;
- Comparison of each investment product available; and
- Deducted fees and expenses in a dollar amount.
Investors will receive an initial disclosure detailing their investment, record-keeping expenses, and other fees deducted from their 401(k) plan by August 30, 2012 and can anticipate receiving the first quarterly statement listing fees by November 14, 2012.
What does this Mean for Small Business Employers?
Since the new disclosure rules expose deducted fees and miscellaneous expenses, employers will have the resources they need to evaluate the price of their plans and they can “shop” around for the best service providers. According to Cerulli Associates, there are approximately 500,000 small and mid-size businesses that offer a 401(k) plan. About 10% of the businesses with fewer than 100 employees have a plan and 99% of companies with greater than 50 employees have a plan. In general, small to midsize employer plans receive less attractive pricing in comparison to large company plans. The new disclosure rules allow employers to view the exact cost of the plan so that they may compare plan options.
401(k) Fee Disclosure Rules Resource: