Since July 16th of last year, millions of people from industry professionals to employers and employees have been awaiting the final ruling on 401(k) fee disclosure. At the beginning of February 2012, the Department of Labor issued their final regulation — notably 408(b)(2) and 404(a)(5), which covers fee disclosure to Plan Fiduciaries and Plan Participants, respectively — to bring full transparency of fees to light. This final ruling supersedes all past ‘interim final’ regulations, and will require full employer fee disclosure by July 1st of this year, and complete employee fee disclosure by August 30th, 2012 (for calendar year plans), which will be seen on the third-quarter statements.
More simply put, now employees must be informed about every fee they’re paying regarding their 401(k) accounts, and employers must know about every fee being charged to the plan, and to the company. In other words, according to FMi Vice President Peter Macaluso, the final ruling mandates a practice his company has always followed.
“FMi has always promoted total transparency and full fee disclosure,” he says. “The ruling is still very important, because it puts everyone on notice to be ready to comply with it by July 1st. For our company, it’s more of an alteration than a change. This is a practice already well-established at FMi; the Department of Labor is now requiring the information we already provide to be presented in a specific format. So we’ll be ready and in full compliance when the July deadline arrives.”
This final ruling spells out specific responsibilities for both employers and employees. “I urge everyone to read the information below to learn how this new regulation effects their company and 401(k) plans,” adds Macaluso. “The more you know, the more control you have over your financial future. As I stated before, FMi has always had a policy of total fee disclosure. If any of our clients desire information regarding fees on their 401(k) plans, our representatives are just a phone call away with the full picture.”
Employers:
It is the responsibility of employers to ask any company providing services to the plan these questions:
1. What services will you provide for the plan?
2. What is the cost for these services?
3. Are you compensated in any other way?
4. Will you provide all necessary fee disclosures?
Employers must make sure the fees being charged to the plan are reasonable (this does not mean they have to be the cheapest, simply competitive and fair). Typically this will involve an RFP every few years or some sort of plan benchmarking service.
Most covered service providers will disclose the list of services provided and the corresponding fees to the employer through their service agreement, contract, or other notice. It is the covered service provider’s responsibility to provide all compensation required to be disclosed, but it will always be the employer’s responsibility to ask.
Employees:
Employees have no responsibility when it comes to fee disclosure, but it would be easier for them if they understood what to expect. Commonly, it is employers who take on the legal role of Plan Administrator, and the Plan Administrator is responsible for ensuring all fee disclosure requirements are met for the employee’s sake. This is similar to the responsibilities of testing and 5500 (the plan’s tax) filing, and these duties are usually outsourced to a third-party administrator or plan provider. We expect the same to happen for employee fee disclosure. In other words, employers are hiring their current providers to do this on their behalf.
Most, if not all, fee disclosures will appear on the employees’ quarterly benefit statement. Anything not on the quarterly statements will be given in the form of an annual notice similar to the Safe Harbor or QDIA notices. Many fees which may or may not have been on the quarterly statement before will now be very conspicuous:
• Asset-based fees will now be a line item, and will be shown both as a percentage and a dollar amount per $1,000, for example: Advisor Fee — 0.50% or $5.00 per $1,000.
• Dollar-based or fixed fees will be shown as a line item with a brief description, and the dollar amount charged to the employee.
• Any fees billed to the employer are not required to be disclosed on the employees’ statements.
While the fees have not changed, employees may just become aware of them. We expect the employees to have many questions. So be prepared.
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