For a number of years, the Department of Labor has been concerned about the amount of fees and expenses charged to tax-deferred retirement plans and the transparency of fee and expense information available to plan fiduciaries and plan participants to assess their reasonableness and effect on investment return. In response, the Department commenced three separate initiatives to improve the transparency of fee and expense information. In this Benefits Brief, we will provide a general overview of the second of those initiatives--regulations requiring service providers to defined benefit plans and defined contribution plans (like profit sharing and 401(k) plans) to provide detailed fee and expense information to the plan’s fiduciaries.
Background and Overview
At the outset, the Department of Labor had to overcome a very real impediment to mandating fee and expense disclosure by brokers, investment advisors, recordkeepers and other parties providing service to a plan -- it had a no statutory authority over those service providers. Its solution was to do so indirectly via the prohibited transaction rules. Those rules generally subject all non-exempt transactions between a plan and certain parties with a close relationship to the plan (e.g., the plan sponsor, officers, directors and key owners of the plan sponsor, and service providers) to an excise tax. Among the numerous exemptions from those rules is one for “reasonable” arrangements for services necessary for the establishment or administration of the plan. Under the DOL’s regulations, an arrangement with a service provider will no longer be considered to be “reasonable” unless the specified disclosures are made.
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