BOSTON—The Department of Labor’s new 401(k) fee disclosure requirements that take effect Jan. 1, 2012 go far beyond disclosing mutual fund expense ratios to cover every nook and cranny of expenses in plans, right down to indirect service providers, speakers said at the FundForum USA 2010 conference here Monday.
Plans must reveal compensation of $5,000 or more they pay to direct service providers on Schedule C of Form 5500, which is the annual report that plans file with DOL, said Jessica Flores, managing partner with Fiduciary Compliance Center. For indirect service providers earning $1,000 or more, plans may either report the figure or provide the formula they use to calculate compensation—but they must report the compensation, Flores said.
DOL will permit mutual fund companies to receive fees from plan assets through new 408(b)2 requirements that require fund companies and all other fund administration vendors to prove that the fees are necessary to the plan and are reasonable in terms of being comparable to other funds on the market, said Tess Ferrera, an attorney with Miller & Chevalier. “If the plan can exit from the contract quickly, it is also considered reasonable,” Ferrera said.
Besides the funds in a plan, this new 408(b)2 market comparison applies to all fiduciary service providers directly associated with a plan, including recordkeepers, brokers, accounting firms, appraisers, banking services, law firms, brokerage and third-party administrators, Ferrera said.
In addition to disclosing fees, plans must provide the DOL with a written description of the services that each of these vendors provides under the contract, as well as a statement that it is a fiduciary.
“The new DOL requirements go far above disclosing an expense ratio to cover all direct and indirect compensation [paid out] by the plan to service providers, affiliates and subcontractors. It’s very different from just the expense ratio,” Flores said. “It applies to revenue sharing, securities lending, brokerage transactions, spreads on structured investment vehicles, and spreads on guaranteed investment contracts in stable value funds. The DOL has really said it wants all indirect disclosure. That also means soft dollars, commissions, finder’s fees, 12b-1 fees, ongoing expenses such as wrap fees—even termination fees.”
DOL doesn’t actually realize what a transformative requirement the new fee disclosures will be, Ferrera said. “DOL thought the indirect disclosure was already happening and that the new requirements just emphasized them more clearly,” she said.