DOL finally issues new 401(k) fee disclosure rules

The Labor Department last week issued much-anticipated fee disclosure rules for providers of services to employee pension plans.

“The new rules are aimed at assisting plan sponsors in assessing the reasonableness of contracts or arrangements, including the reasonableness of the service providers’ compensation and potential conflicts of interest,” according to a statement from the department.

Translation: Plan fiduciaries should find it easer to assess the actual fees that plan providers charge.

Financial advisers, on the other hand, will likely need to revisit their service agreements, as well as spell out any possible conflicts of interests.

The new rules (referred to as the 408(b)(2) rules after a section in the Employee Retirement Income Security Act of 1974) require registered representatives, investment advisers and others who work with 401(k) plan sponsors to provide detailed overviews of their services and compensation, as well as declare whether they are acting as fiduciaries.

All service providers, both bundled and unbundled, will have to disclose all fees in a consistent manner, including those arising from record-keeping services. Backers of the new rules said that plan sponsors will be able to make a more accurate assessment when comparing the fees of competing plan providers.

The new rules — technically interim final rules that don’t go into effect until July 2011 — have been the source of much controversy.

Critics have long charged that 401(k) and other defined-contribution-plan participants don’t have a clear sense of the fees and expenses charged by plan providers. Those charges, they argue, can take a sizable bite out of the funds in the retirement plans.

A provision to require providers to disclose fees in DC plans was initially included in a congressional tax extenders bill introduced last month. But the provision led to great uncertainty, particularly for advisers who were already bracing for the new law.

It ultimately was stripped from the measure. Published reports at the time said that Congress was expected to let the Labor Department address the issue of fee disclosure, and that is what has happened.

“This is one of those things that has been pending for so long, and we’ve heard rumors about passing legislation and issuing regulations so frequently,” said Gregory Ash, partner at Spencer Fane Britt & Browne LLP and chairman of the firm’s ERISA litigation group. “It’s like the boy who cried wolf; you believe it and pay attention when you finally see it, and now we’re finally seeing something come through.”

Brian Graff, executive director of the American Society of Pension Professionals and Actuaries, lauded the new rules.

“We believe these new fee disclosure rules benefit both plan sponsors and providers,” he said in a statement. “Providers now have clear guidance on what disclosures are required, and plan sponsors will have the information they need to make informed choices about their retirement plans.”

The rules differ from the department’s initial proposal. Notably, they don’t require a formal written contract spelling out disclosure obligations.

Instead, the rules focus on the substance of the disclosure that must be provided.

In addition, the rules modify the categories of service providers that must comply with the disclosure requirements, including fiduciaries, investment advisers and record keepers or brokers who make investment alternatives available to a plan.

Advisers who haven’t anticipated the rules may have to examine their revenue streams to find out if they are consistent with the new regulations, Mr. Ash said.

“They’re going to have to revise their service agreements fairly substantially to address some of the requirements of the rule, if they haven’t already done so,” he said.

And looking at it more broadly, the new regulations also have the effect of “formalizing” the fiduciary relationship between advisers and plan sponsors, Mr. Ash said.

An additional incentive for more examination and more communication between advisers and plan sponsors came in the form of a recent ruling from a California federal court. Taken with that decision, Tibble v. Edison International, which ruled that a plan fiduciary had violated the duty of prudence in some cases by not finding out whether cheaper institutional-class shares were available for participants, it is clear that advisers and plan sponsors have more of a responsibility to do more telling and more asking.

In the future, advisers should take it upon themselves to inform plan sponsors directly that there may be multiple share classes available and to discuss that possibility with them, Mr. Ash said.

“The regulations formalize that advisers must acknowledge whether they’re fiduciaries of the plan, and the case says outside advisers have an obligation to look at multiple share classes,” he said. “You read the two together, and that’s the connection.”

E-mail Hilary Johnson at [email protected].