Plan Sponsors and Plan Fiduciaries - It's Time to Comply with the New Retirement Plan Fee Disclosure Regulations

by Poyner Spruill LLP

[authors: Hugh W. Davis II, Nancy C. Brower]

Earlier this year, the Department of Labor issued final regulations governing the disclosure of fees and related information by retirement plan vendors to plan fiduciaries.  The final regulations replace the DOL’s 2010 interim regulations.  The final regulations also extend the compliance deadline from April 1, 2012 to July 1, 2012.

Retirement plan fiduciaries (such as the plan sponsor and those of its employees who are responsible for plan investments or administration) will have to become familiar with these regulations.  While it is the service provider that is responsible for satisfying the fee disclosure rules, the consequences of noncompliance are shared with the plan fiduciaries.  This means, for example, that the employer sponsoring the plan may be liable for prohibited transaction excise taxes on account of the service provider’s failure to provide required disclosures.

July 1, 2012 Compliance Deadline

Starting July 1, 2012, covered service providers for ERISA pension and 401(k) plans must provide plan fiduciaries with written information on fees and expenses “reasonably in advance” of the date the contract is entered into, extended or renewed.  For contracts or arrangements entered into before July 1, 2012, covered service providers must provide the required information to the responsible fiduciary before that date.  In other words, plan fiduciaries need to make sure they have received written fee disclosures from existing plan vendors before July 1.

Contents of Written Fee Disclosure – General Rules

A covered service provider’s written disclosures to the responsible plan fiduciary must include the following information:

  • A description of services provided pursuant to the contract;
  • If applicable, a statement that the service provider (or an affiliate or subcontractor) will provide services as an ERISA fiduciary or as a registered investment adviser;
  • A description of all direct compensation the service provider (or an affiliate or subcontractor) expects to receive, either in the aggregate or separately by service;
  • A description of all indirect compensation the service provider (or an affiliate or subcontractor) expects to receive, including identification of the payer and the services for which the indirect compensation will be received, and a description of the arrangement between the payer and the service provider, affiliate or subcontractor;
  • If set on a transaction basis or charged directly against a plan investment and reflected in the investment’s net value (e.g., 12b-1 fees), a description of compensation that will be paid among the service provider, an affiliate or a subcontractor, including identification of the payers and recipients and the services for which such compensation will be paid;
  • A description of any compensation the service provider (or an affiliate or subcontractor) expects to receive on termination of the contract, and how any prepaid amounts will be calculated and refunded; and
  • A description of the manner in which compensation will be received (e.g., billed to the covered plan, or deducted from plan accounts or investments).

A covered service provider is generally required to inform the responsible plan fiduciary within 60 days of any change in this information.

Contents of Written Fee Disclosure – Recordkeeping Services

If the arrangement includes recordkeeping services for the plan, the covered service provider’s written disclosures to the responsible plan fiduciary must include the following information:

  • A description of all direct and indirect compensation the service provider (or an affiliate or subcontractor) expects to receive in connection with the recordkeeping services;
  • If the service provider reasonably expects recordkeeping services to be provided in whole or in part without explicit compensation, or if compensation for such services is offset or rebated based on other compensation received by the service provider (or an affiliate or subcontractor), a good faith estimate of the cost to the plan of the recordkeeping services, including an explanation of how the cost is determined and a detailed explanation of the recordkeeping services that will be provided; and
  • A description of the manner in which compensation will be received (e.g., billed to the covered plan, or deducted from plan accounts or investments).

A covered service provider is generally required to inform the responsible plan fiduciary within 60 days of any change in this information.

Contents of Written Fee Disclosure – Investment Options

In the case of a 401(k), 403(b) or other individual account plan that allows participants to direct investments among different designated investment options, the covered service provider must also provide certain investment disclosures for each such investment option:

  • A description of any compensation that will be charged directly against the investment (e.g., commissions, sales loads, deferred sales charges, redemption fees, etc.), if not included in the annual operating expenses for that investment;
  • A description of the total annual operating expenses for the investment, expressed as a percentage;
  • Any other information that is required by the plan administrator to comply with participant fee disclosure regulations; and
  • A description of the manner in which compensation will be received (e.g., billed to the covered plan, or deducted from plan accounts or investments).

The service provider must notify the plan fiduciary of any changes to investment information at least annually.

Note that there are special disclosure rules that apply when the assets held by the investment vehicle are deemed to be assets of the retirement plan investor.  Generally speaking, these rules will not apply to mutual funds.


If a covered service provider fails to comply with the rules, amounts paid by the plan in connection with the provider’s contract or arrangement may be considered prohibited transactions under ERISA and the Internal Revenue Code – even if the fees and expenses are otherwise reasonable.  If amounts paid by the plan are prohibited transactions, the service provider and the responsible fiduciaries would be jointly and severally liable for federal excise taxes and potentially liable for other civil penalties.

A plan fiduciary responsible for causing a retirement plan to enter into an arrangement can insulate itself from the prohibited transaction risk.  The regulations exempt a fiduciary from prohibited transaction penalties if the fiduciary does not know that the service provider has failed to comply.  However, this exemption is only available if (1) the fiduciary reasonably believes that the service provider has disclosed the required information, and (2) the fiduciary takes certain other steps promptly upon discovering the failure.  These steps include requesting the disclosure from the service provider in writing and, if the service provider fails to respond within 90 days, reporting the noncompliance to the Department of Labor.

Preparing for the July 1 Deadline

Employers should take the following steps in preparation for the July 1, 2012 deadline:

  • Identify plans that are subject to the new rules (generally, any funded pension, profit sharing, 401(k) or 403(b) plan subject to ERISA);
  • Identify all of the fiduciaries for each covered plan, and specifically the fiduciary or fiduciaries responsible for vendor and investment selection and monitoring;
  • Identify service providers for each plan (including recordkeepers, accountants, actuaries, investment advisors, custodians, etc.), and confirm which providers are covered by the new rules; 
  • Ask covered service providers to confirm what they will be doing to comply, and when; and
  • Implement procedures for the appropriate fiduciary to review service provider disclosures to make sure they comply with the regulations, to document the review process, and to take appropriate actions (as prescribed by the regulations) when noncompliance is suspected.

Plan fiduciaries are required to provide fee disclosure statements to plan participants no later than 60 days after the vendor disclosure deadline, or August 30, 2012.  Plan fiduciaries should consider how these disclosures will be provided to participants and take steps to deliver such disclosures in advance of applicable deadlines.

Employers and plan fiduciaries should keep in mind that the new rules are in addition to the general fiduciary duty to exercise prudence in the selection and monitoring of service providers, and in making sure that fees paid by a retirement plan are reasonable.  Plan fiduciaries will need to take the new service provider fee disclosures into account in determining whether fees and expenses are competitive given the nature and quality of the services.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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