The Department of Labor deadline for providing participants with quarterly fee disclosures is fast approaching. The quarterly fee disclosure requirement applies generally to individual account retirement plans (such as 401(k) plans) that provide for participant-directed investments and are governed by the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). Plans that do not allow for participant-directed investments are not subject to the new quarterly fee disclosure requirements.
Participant Level Disclosure Deadlines
For covered calendar year plans, the deadline to provide initial quarterly fee disclosers to plan participants is November 14, 2012. The deadline for non-calendar year participant-directed individual account plans is the date that is 45 days following the close of the plan year quarter in which the plan sponsor first receives required plan level fee disclosures from the plan’s service providers. The quarterly participant fee disclosures are in addition to the annual participant fee disclosures that initially were due no later than August 30, 2012.
Quarterly Participant Fee Disclosure
The quarterly participant fee disclosure rules require plan sponsors to provide participants with information regarding plan-wide expense amounts actually charged to their accounts during the preceding quarter. The disclosure must include a description of the plan-wide services to which the charges relate, such as recordkeeping or accounting. The disclosures must also contain an explanation, as applicable, of whether a portion of the plan’s expenses were paid from the annual operating expenses of one or more of the plan’s designated investment alternatives (for example, 12b-1 fees).
In addition to the disclosure of plan-wide expenses incurred in the prior quarter, the quarterly disclosure must include expenses that are charged to the account of the participant for specific plan related services the participant received during the prior quarter (e.g., participant loan processing fees, qualified domestic relations order processing fees and brokerage window fees).
For purposes of the quarterly disclosure rules, “quarterly” means at least once in any three-month period, without regard to whether the plan operates on a calendar or fiscal year basis.
The quarterly participant fee disclosure may be provided to participants as a separate quarterly statement, or the information may be included in participants’ quarterly plan benefit statements.
Annual Participant Fee Disclosure
The annual participant fee disclosure requires plan sponsors to provide participants with an explanation of the types of fees and expenses that may be incurred for plan administration (such as accounting and record keeping fees) that may be charged against the individual accounts of plan participants, and that are not otherwise disclosed in the annual operating expenses of any of the plan’s designated investment alternatives. The description must also include the basis upon which the expenses are allocated among participant accounts (for example, pro rata or per capita).
For purposes of the annual disclosure rules, “annual” means at least once in any twelve-month period, without regard to whether the plan operates on a calendar or fiscal year basis.
Failure to Comply with the New Quarterly Disclosure Rules
Under the new rules, fee disclosure is a fiduciary duty. As such, a failure to comply with the rules does not result directly in monetary penalties specific to that failure (as in other cases, such as a failure to timely file a Form 5500). However, a failure to comply with the new disclosure requirements constitutes a breach of fiduciary duty to disclose the requisite plan and investment-related information, and could result in residual fiduciary liability. For example, failure to comply with the new disclosure rules may result in a loss of ERISA Section 404(c) fiduciary protection against losses that participants incur as a result of directing their plan investments, thereby exposing the fiduciary to potential law suits.
Most information that sponsors are required to disclose will be obtained by the sponsor from various plan service providers. A plan sponsor may reasonably and in good faith rely on information it receives from its service providers, and therefore to some extent is protected from liability for the completeness and accuracy of the information used in the disclosures.
What to do Now
If you have not already done so, contact your third-party administrator, record keeper or other service provider to ensure that they will be providing your participants with the necessary quarterly disclosures not later than November 14, 2012, and confirm that all required information is included in those disclosures.
For additional information, please see our Employee Benefits ALERT dated February 3, 2012 (“Approaching Deadlines for Retirement Plan Fee Disclosure Rules: What Clients Should Do Now”).
