Gearing up for
participant fee disclosure
The U.S. Department of Labor (DOL) has been working to improve transparency regarding the fees and expenses charged to 401(k) plans and plan participants.
The first step was to require plans to report such charges on Schedule C of Form 5500. The second requires covered service providers to disclose to plan fiduciaries the fees the plan pays the providers. The final step requires plan sponsors to provide participants who direct their own investments with information about the fees and expenses that are charged to their 401(k) plan accounts.
The general consensus within the industry is that the vast majority of participants are not aware that they pay any fees or expenses and will be surprised - to say the least - by the new disclosure. Here are some details about the regulations to help employers handle questions from participants.
Fees and expenses explained
There are three different types of expenses that may be incurred:
Sponsors will want to let participants know that these fees are not new. What is new is the disclosure they'll receive, which will provide a breakdown of the fees and expenses participants pay out of their accounts. Sponsors should also point out that the plan fiduciary is continually monitoring the fees and expenses to ensure that they are reasonable and competitive.
User-friendly investment information
The fee disclosure will feature a chart reflecting all the investment choices in a format that will permit participants to compare investments in a whole new way. The investment options will be grouped by category (i.e., variable return investments, fixed return investments, and annuities).
The chart will be broken down into several tables that compare investment returns, fee and expense information, and annuity options. The chart will tell participants how to get additional investment information (including more current performance information) and provide Internet addresses. Each designated investment alternative must be identified by name.
For each plan investment with a variable rate of return, the disclosure will show the investment's total operating expenses as a percentage and provide an example illustrating the effect, in dollars, of the annual operating expense on a $1,000 investment for a one-year period. The disclosure will also include descriptions of the investment's shareholder fees (if any) and any restrictions or limitations on purchases, transfers, or withdrawals.
Empowering participants
All of this information is being provided to help participants make informed decisions about their plan investments and to help them save as much as possible for retirement by underscoring the long-term effect that fees can have on the total amount a participant has available when it comes time to retire. It's also important for participants to understand that investment selection should not be based solely on fees. There are a number of other factors to consider, such as risk tolerance and potential investment return.
Disclosure timing
Fee disclosure information will be provided annually. It is hoped that each participant will carefully review this information at least once a year. Note that website addresses are provided for each investment option, so participants can look up current information at any time. Participants will also receive quarterly statements that identify any activity in their individual accounts for the previous quarter along with a description of the fees paid.
Under current regulations, calendar-year plans must provide participants with the first annual fee disclosure by May 31 and the first quarterly fee and expense statement by August 14. However, at press time, the DOL is considering an extension.
(Mar/Apr 2012 Retirement Plan News)
