Monday, February 13, 2012

DOL Finalizes Fee Disclosure Regulations.

It's been nearly two weeks since the Department of Labor (DOL) finalized its regulations under
Section 408(b)(2) of ERISA. For those of you who are more words people than numbers people, those are the fee disclosure regulations that require service providers (vendors) to inform plan fiduciaries just how and how much those vendors are getting paid for their services.

It's been interesting hearing some of the observations to the finalizing of this regulation. One experienced retirement practitioner noted to me that this regulation was the result of a recent law change. Hmm, ERISA, recent, Gerald Ford signed it into law and he died in 2006. He last signed a piece of federal legislation in 1977, not exactly recent in the benefits industry. Another experienced benefits practitioner remarked that these regulations were the result of a new government agency established under the Obama Administration. Well, for those of you who are not fans of our current president, there are many things that you could probably choose to blame him for, but I can assure you that President Obama did not create the Department of Labor.

On to the actual guidance ... I'm going to assume that if you are reading this that you have at least some knowledge of the history of this regulation. If not, you can certainly look in this blog under the label "Fees" or in thousands of other places on the internet. Or, you can read my take here or here.

Effective Date

The effective date is now July 1, 2012, postponed from April 1, 2012. Since an earlier DOL pronouncement synced the timing of the effective date of this regulation with the participant-level disclosures under ERISA Section 404(a)(5), the initial disclosures for calendar-year plans under those regulations will be due on or before August 30, 2012.

Electronic Delivery

The body of the regulation is silent. However, nerdy people like me who read a lot of regulations from the DOL and IRS know that in recent years, the preamble to regulations is often (read that as almost always) far more useful and informative than the regulation itself. The preamble, in this case, tells us that there is nothing in the regulation that would limit the ability of service providers to furnish fee disclosures electronically including making that information available on a website so long as participants are notified how they may access those disclosures. [Tell me, why doesn't the government do what a normal person would do and specify in the regulation what vendors can do to fulfill their requirements?] In any event, the regulation indicates the DOL's expectation that 50% of disclosures will be provided electronically. I expect that the DOL's margin of error in making that statement is not more than 50%.

The Disclosure Goesintas

For the uninformed, goesintas is an old term (I think it comes from 298th century BCE (we used to call that BC) Aramaic) for what goes in to something. The analogue for the really curious is the comesoutas. For the most part, this has not changed from earlier proposals. However, at some point in the future, the DOL may require service providers to give fiduciaries a guide to understanding the disclosures. For the time being, there is a sample guide in an appendix to the regulation. And, there is a placeholder in the regulations for such a guide.

For the curious, the sample has two columns. The first column lists services [to be] provided. The second column shows where in the service agreement (if you don't have a service agreement, you can't use this) that service can be found or where information related to investment fees and expenses can be found online.

Enhancing the Technical Details

Service providers will be required to provide to plan fiduciaries sufficient information to assess the reasonableness of both direct and indirect compensation. While the interim regulation required the service provider to at least estimate the amount of indirect compensation it expects to receive, the services for which that compensation is to be received, and from whom that compensation is to be received, the final regulations require that the relationship between the service provider and the payer be disclosed. So, for example, under the final regulations, the service provider might identify a payer as a subcontractor, an affiliate, or a subsidiary.

Certain investment products are often referred to as look through investments. In 401(k) plans, for example, perhaps the most common of these are collective investment trusts (CITs). Under the interim rule, the disclosures were required to contain:

  1. compensation charged directly for acquisitions, sales, transfers, or withdrawals
  2. annual operating expenses or expense ratio unless the product's return is fixed
  3. ongoing expenses
Under the final regulations, a designated investment product (DIA) need not disclose numbers 2 and 3. Instead, it must disclose total annual operating expenses which in turn must be disclosed to participants under the disclosure regulations that apply to them.

What Brokers and Recordkeepers Have to Tell Fiduciaries

The change from the interim rules appears to be fairly subtle in this regard. For most organizations, I think it will be. Under the interim rules, recordkeepers with DIAs on their platforms were required to provide certain DIA information on their platforms. They could satisfy that requirement by passing through information from the issuer, typically a prospectus, but the materials had to be regulated by a governmental agency. The new rules change the government oversight. No longer do the materials need to be regulated, but instead, the issuer of the pass-through materials needs to be regulated. Further, the issuer may not be affiliated with the recordkeeper in order to use the pass-through rule, but the regulations indicate that the requirement can be met by replicating materials.

... time out for a rant ... what is the significance of copying and pasting as compared to just passing through? I don't think I am overly stupid, but this seems like burden for the sake of burden.

... now we return to our regularly scheduled programming ...

Information Requests

The interim rules required service providers to respond to requests (for Form 5500, for example) for additional information from fiduciaries within 30 days. The final regulation changes that to "reasonably in advance" of the governmental filing deadline.


In keeping with the interim rule, the final rule says that corrections to disclosures must be provided within 30 days. The final rule, however, adds that such corrections must include errors and omissions, not just corrections.


Where there is an explicit fee agreement (e.g., contract) in place, this information must be disclosed. Where there is not, the final regulation specifies that reasonable estimates must be made and that any assumptions used to make those assumptions must be disclosed. Further, the final rule indicates that ranges may be used as a reasonable method of disclosure of compensation. However, the final rule states that where more precise information is available, it is to be disclosed.

So, that's about it. The remainder is generally unchanged. Since this is a final rule, and we haven't heard people screaming yet, it looks like disclosures will begin being provided by mid-year. That's not bad. ERISA was signed into law on September 2, 1974 (Labor Day). We get required disclosures in less than 38 years.

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