DoL Says Disclosure to Empower Participants

Fee disclosure rules are designed to “make sure everyone knows what they are paying for and how this affects plan balances,” according to Phyllis Borzi, Assistant Secretary of Labor of the Employee Benefits Security Administration (EBSA).

Borzi told the press in a teleconference that “the ultimate goal is to empower participants to make more informed choices of investments, and the first step is to allow plan fiduciaries to make informed choices.” She noted that plan fiduciaries have been required to inform participants about fees they are paying, but this has been difficult with so many plans using bundled services for which the fees are not broken down.  

The interim final rule published by the EBSA on Thursday provides that because certain services and costs are so significant or present the potential for conflicts of interest, information concerning those services and costs must be disclosed without regard to whether services are furnished as part of a bundle or package. For example, service providers must disclose whether they are providing recordkeeping services and the compensation attributable to such services, even when no explicit charge for recordkeeping is identified as part of the service contract.  

Borzi admitted that breaking out recordkeeping fees was a point of contention in comments received on the proposed regulations, but she said the department heard from so many plan sponsors that they think recordkeeping is free, so the agency ultimately concluded that it is important for plan fiduciaries to understand that recordkeeping is not free, particularly fiduciaries for small and medium plans that don’t have the kind of leverage to make prudent decisions with providers. Michael Davis, EBSA Deputy Assistant Secretary, noted that recordkeeping is a significant percent of cost of bundled services, sometimes up to 20%.  

Davis also said that as an alternative to telling someone there may be a conflict of interest, the EBSA was convinced that specifically disclosing whose paying whom for what services would work better.  

The interim final rule focuses on disclosure of fees by service providers to plan fiduciaries. Borzi said the second step in reaching the ultimate goal is a final rule on fee disclosure to participants, which has been submitted to the Office of Management and Budget, and should be published soon. “After that we will have an organized system of helping plan fiduciaries and participants make informed choices,” she declared.  

While the proposed rules applied to defined benefit, defined contribution, and health care plans, the interim final rule only applies to DB and DC plans. Borzi said rules regarding fee disclosure for health care plans will be addressed separately. She also noted that the agency is doing its best to make sure definitions in fee disclosure regulations match up with those used for Form 5500 Schedule C reporting.  

Borzi explained that an interim final rule has the full effect of law, but on an interim basis. The substance is what the agency wants, but after comments, it will clarify points in the rule or issue additional guidance. If there are any changes, the agency will issue a final regulation. 


DoL Rule Versus Legislation  

While Borzi, quoting Secretary of Labor Hilda Solis, credited legislators with helping make possible the publication of the EBSA’s interim final rule on fee disclosure (seeCongress, Labor Close Ranks on Fee Disclosure) in her press teleconference on Thursday, some are still questioning whether Congress will pursue a legislative approach to the retirement plan fee disclosure issue. Ed Ferrigno, Vice President of Washington Affairs at the Profit Sharing/401(k) Council of America (PSCA) said the EBSA’s rule has more similarities than difference with legislative proposals, but the differences cause the Council some concern.  

As with others in the industry, Ferrigno said the Council is still wading through the regulations before offering an analysis, but it prefers the legislative approach on two points. Proposed legislation on fee disclosure offers a direct new obligation for service providers to provide information rather than working it into prohibited transaction rules where plans will have liability if there is a violation, and requires information to be provided in one written statement versus using multiple documents such as different fund prospectuses.  

In the rule’s preamble, the EBSA discusses the rule as a tool to help plan sponsors fulfill their fiduciary duty to make service provider and investment selection that is in the best interest of participants. While a related class exemption provides some relief on prohibited transaction liability for plan sponsors, Ferrigno said an approach where plan fiduciaries would have no liability would be better.  

Ferrigno said the Council believes a single written statement would also be a better requirement because it would provide fee information in a clearer, easier to understand manner.  

Still, in general, the industry believes rules on fee disclosure are a good thing. In a statement Brian Graff, executive director/CEO of the American Society of Pension Professionals & Actuaries (ASPPA), said: “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.”  

Graff noted that because of the new guidance amending the Employee Retirement Income Security Act Section 408(b)(2), the rules on fee disclosure will be applied in a uniform manner to all retirement service providers, regardless of how plan services are delivered, and the specific requirement for the disclosure of fees associated with recordkeeping services, is now the standard for both bundled and unbundled service providers.  “By promoting fair competition, these new fee disclosure requirements will help ensure that the fees paid by plan sponsors and participants for retirement plan services are reasonable,” Graff said.  

According to the statement,  ASPPA and its affiliated organizations, which include the Council of Independent 401(k) Recordkeepers (CIKR), and the National Association of Independent Retirement Plan Advisors (NAIRPA), have long advocated for required disclosure of fees for retirement plan services such as investment management, recordkeeping and administration, and transaction based charges.  Reflecting the EBSA’s intended ultimate goal, Graff pointed out that: “Such information will allow plan sponsors to make educated decisions about how to operate their retirement plans to the ultimate benefit of plan participants.”  

The text of the interim final rule, a fact sheet, and class exemption model notices can be found on