Regulatory Update: 408(b)(2) & 404(a) Fee Disclosure Regulations

Please realize - ERISA industry service providers are just now finalizing how to meet and help sponsor clients meet these just released regulations. You should receive separate disclosure communications from each of your plan service providers over the next few months.

  

ERISA 408(b)(2) - Requires all plan service providers to fully disclose to the plan fiduciary (usually the plan sponsor) information on all fees, compensation and services provided to the plan, and requires the plan fiduciary to review the fees for reasonableness and appropriateness.  The intent of this regulation is to allow a plan sponsor to better determine if the compensation paid to their plan service providers from plan assets and participant accounts is appropriate for the scope and quality of services provided by that service provider.

ERISA 404(a) - Requires the plan fiduciary to communicate all plan fees to eligible employees, plan participants and plan beneficiaries with the right to direct investments, plus specific information about the plan's investment options. The intent of this regulation is to allow those covered by the plan to make informed decisions about their plan investment options and available plan services.  This regulation requires those covered by the plan be given an annual statement that provides a general explanation on their investment choices, investment fees and expenses for each option, and investment performance / benchmarking information.  Each participant with a balance in the plan must receive a quarterly statement that provides a detailed explanation of any fee actually assessed to their account during the previous quarter.  One major difference between the two notices is that the annual notice is required to be provided to ALL ELIGIBLE employees, while the quarterly statement is only required to be provided to participants WITH A BALANCE in the plan.

ERISA 408(b)(2) - For existing plans a plan fiduciary must receive a service and fee disclosure from their plan service providers no later than 7/1/2012.  A plan fiduciary hiring a new service provider on or after 7/1/2012 must obtain and review the service provider's disclosures before engaging any new provider.  The DOL did NOT mandate a reporting format for service provider disclosures.  They did however provide a sample as an exhibit in these regulations.  

ERISA 404(a) - Initial, quarterly and ongoing participant disclosures are effective 60 days after 408(b)(2) is effective, which begins 8/30/2012.  All Eligible employees currently covered by a plan must be given an initial 404(a) disclosure by or before 8/30/2012.  For calendar year-end plans, the first quarterly participant 404(a) disclosure for covered employees is required by 11/14/2012, which is effectively the 9/30/2012 quarterly statement for calendar year plans.  The DOL has NOT yet mandated a reporting format for investment disclosures.  The DOL did provide a detailed roadmap for what information must be shown in the investment option disclosures.  

ERISA 408(b)(2) - This regulation APPLIES to all ERISA defined contribution plans.   This includes, for example: 401(k) plans, profit sharing plans, money purchase pension plans, ERISA 403(b) plans, ESOPs, and to all ERISA defined benefit plans.   This regulation DOES NOT APPLY, for example, to certain frozen 403(b) plans, non-ERISA 403(b) plans, HR-10 plans, SEPs, SIMPLE Plans and IRAs. 

ERISA 404(a) - This regulation applies to all ERISA plans where participants may direct their investments.

The DOL established three categories of plan service providers.   Any provider who provides one or more services to a plan in any category is considered a plan service provider - and required to provide the plan sponsor with disclosures to help the sponsor meet these new disclosure regulations.

  

ERISA 408(b)(2) - You will be required to obtain and review all services, fees and compensation information for your service providers to determine if the charges are reasonable and appropriate for your plan. You can anticipate each of your plan service providers will provide their 408(b)(2) disclosures to you before 7/1/2012.  If not, you should contact your service provider for this information.

ERISA 404(a) - You will be required to obtain and communicate all plan fees to participants, to provide annual disclosure documents that include plan-related information, and to provide investment information on plan investment options, and also quarterly statements showing the actual fees paid by participants. You can anticipate that each of your plan service providers will provide you with their initial 404(a) disclosures for you to distribute to employees covered by your plan before 8/30/2012.  If not, you should contact your service provider for this information.

ERISA 408(b)(2) - If a plan fiduciary fails to satisfy this regulation the result is an ERISA prohibited-transaction with required excise taxes. You should monitor each of your plan service providers to ensure they each timely provide you with their applicable 408(b)(2) disclosures before 7/1/2012.

ERISA 404(a) - There are currently no announced penalties for non-compliance.  However, failure to comply with 404(a) disclosure regulations could result in a breach of fiduciary duty, which may expose the plan sponsor to civil penalty and/or participant lawsuits.     

 

ERISA 408(b)(2) - BPC will send all plan sponsors affected by these regulations an updated service agreement, along with our specific 408(b)(2) disclosures prior to July 1, 2012. BPC is using a prominent nationally recognized ERISA firm to update our service agreement and to confirm BPC's 408(b)(2) disclosure format. 

  

ERISA 404(a) - BPC will send all plan sponsors affected by these regulations a BPC 404(a) disclosure prior to August 30, 2012.  For clients using a daily recordkeeping platform, some recordkeepers may allow BPC to consolidate our 404(a) disclosures with their 404(a) disclosures - but this is a fluid and a generally unconfirmed option.   

 

Conclusion.   For clients and plans covered by these new regulations BPC's disclosures under these new regulations will be timely and complete.   If these regulations apply to your plan you should also start watching for incoming 408(b)(2) disclosures  from your other service providers, and then later, their 404(a) disclosures - most notably from your daily investment platform recordkeeper  (if that is your plan recordkeeping format ) and from your plan investment advisor.   

The industry is encouraging the DOL to better address the logistics of 404(a) disclosures, including more practical ways for the electronic delivery of 404(a) disclosures, including consolidated electronic disclosures from all providers.    Initially it is possible employees receiving multiple 404(a) disclosures will have questions and need assistance.   BPC is prepared to assist you in disclosures inquiries for BPC services.   Your other service providers will also be available to respond to you on behalf of their services.