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Fee Disclosure Handbook


Part 1 — — Provider-sponsor disclosure rules

The regulation adds an elaborate set of fee disclosure requirements for the availability of the ERISA exemption for service providers. Violations are subject to ERISA sanctions (including an excise tax on the provider) for prohibited transaction violations.

Summary —

·         The rules for single provider arrangements are generally straightforward. Direct compensation must be disclosed; indirect compensation (generally, compensation not received from the sponsor or the plan) must be disclosed, and the services, indirect payer and the terms of the indirect compensation arrangement must be disclosed. There are special rules for the disclosure of recordkeeping and investment services.

·         Where services are provided under a single arrangement with multiple providers (a “bundled arrangement”), the rules are more complicated.

o         The party entering into the contract or arrangement with the plan is the covered service iiiiiiiiiio provider responsible for making the rule’s disclosures, even if other parties (e.g., affiliates or iiiiiiioo subcontractors) perform some of the services.

o         Generally, there’s no “unbundling” (explicit identification) of direct compensation (but see the iiiiiiiiiio rules for recordkeeping and investment services).

o         With respect to indirect compensation received by anyone (including a subcontractor) in the iiiiiiioo bundle, the services, indirect payer and the terms of the indirect compensation arrangement iiiiioioi must be disclosed.

·         In any case, an explicit charge for recordkeeping services must be identified; where there is no explicit charge, one must be estimated.

·         In any case, the following detailed information with respect to investment services must be provided: (1) sales loads; (2) operating expenses; and (3) information within the service provider’s control that the plan sponsor needs to fulfill its disclosure obligations to participants. This information must be provided either by the covered service provider or, where there is a recordkeeping + fund platform arrangement, the platform provider.

I. Plans covered

The final regulation applies to most ERISA pension plans, including 401(k) plans.

II. Service providers covered

A “covered service provider” is a service provider (1) with a direct relationship with the plan (i.e., one “that enters into a contract or arrangement with the covered plan”), (2) with respect to which it (or an affiliate or subcontractor) reasonably expects to receive $1,000 or more in direct or indirect compensation, (3) in connection with the provision of covered services. So, as a general matter, service providers (e.g., certain subcontractors) that do not deal with the plan would have no direct disclosure obligation under the rule.

Example: in cases when a “bundled” arrangement of multiple services is offered to the covered plan, only one service provider would need to furnish the required disclosures for the bundled services. For example, a recordkeeper (Recordkeeper) who enters into a contract with a covered plan to furnish specified recordkeeping services and to make available a platform of investments may outsource some of the recordkeeping and plan administration services, and pay transaction-based compensation, to an affiliated third party administrator (TPA). The TPA does not have any separate contract or arrangement with the covered plan. Although both the Recordkeeper and the TPA provide services that are described in the categories of covered service providers under the final rule, only the Recordkeeper is the covered service provider.

III. Covered services

The new rules only apply to the provision of certain defined services. Thus, the provider of, e.g., certain office services (e.g., a copy or messenger service) would not be covered. Providers of the following services are covered:

A. Fiduciary services. Providers of fiduciary services are divided into three subcategories:

1. Those providing services directly to the plan as an ERISA fiduciary.

2. Those providing services as a fiduciary to an investment contract in which the plan has a direct equity investment (a direct equity investment does not include investments made by the investment contract, product, or entity in which the covered plan invests). Thus, the rule applies to fiduciaries to the initial-level investment vehicle.

3. Those providing services as an investment adviser registered under either the Investment Advisers Act of 1940 or State law.

B. Recordkeeping+investment platform service providers. Providers of recordkeeping or brokerage services to a DC plan that permits participants to direct the investment of their accounts, if one or more designated investment alternatives will be made available (e.g. , through a platform or similar mechanism) in connection with such recordkeeping services or brokerage services.

C. Other services for indirect compensation. Accounting, auditing, actuarial, appraisal, banking, consulting (i.e., consulting related to the development or implementation of investment policies or objectives, or the selection or monitoring of service providers or plan investments), custodial, insurance, investment advisory (for plan or participants), legal, recordkeeping, securities or other investment brokerage, third party administration, or valuation services provided to the covered plan, for which the covered service provider, an affiliate, or a subcontractor reasonably expects to receive (i) indirect compensation or (ii) “compensation paid among related parties” (as described below).

IV. Initial disclosure requirements

As a general matter, a plan cannot enter into a relationship with a “covered service provider” unless certain information is provided in writing to a responsible plan fiduciary, as follows:

A. Services — a description of the services to be provided.

B. Status — if applicable, a statement that the covered service provider, an affiliate, or a subcontractor will provide, or reasonably expects to provide, services as a fiduciary or as an investment adviser registered under the 1940 Act or any State law.

C. Compensation — a description of compensation to be received including:

1. All direct compensation, either in the aggregate or by service, that the covered service provider, an affiliate, or a subcontractor reasonably expects to receive in connection with the services.

2. All indirect compensation that the covered service provider, an affiliate, or a subcontractor reasonably expects to receive. Disclosure of indirect compensation must include an identification of the services for which the indirect compensation will be received, identification of the payer of the indirect compensation and a description of the arrangement between the payer and the covered service provider, an affiliate, or a subcontractor.

3. All compensation paid among related parties that is set on a transaction basis (e.g., commissions, soft dollars, finder’s fees) or is charged directly against the covered plan’s investment and reflected in the net value of the investment (e.g., Rule 12b-1 fees), including identification of the services for which such compensation will be paid and identification of the payers and recipients of such compensation (including the status of a payer or recipient as an affiliate or a subcontractor).

4. Any compensation that the covered service provider, an affiliate, or a subcontractor reasonably expects to receive in connection with the termination of the arrangement, and how any prepaid amounts will be calculated and refunded upon such termination.

Compensation is generally defined as anything of monetary value (for example, money, gifts, awards, and trips); “direct” compensation is compensation received directly from the covered plan; “indirect” compensation is compensation received from any source other than the covered plan, the plan sponsor, the covered service provider, an affiliate, or a subcontractor.

A description of compensation may be expressed as a monetary amount, formula, percentage of the covered plan’s assets, or a per capita charge for each participant or, if the compensation cannot reasonably be expressed in such terms, by any other reasonable method. The description may include a reasonable and good faith estimate if the covered service provider cannot otherwise readily describe compensation or cost and the covered service provider explains the methodology and assumptions used to prepare such estimate. Any description or estimate must contain sufficient information to permit evaluation of the reasonableness of the compensation.

D. Special rules with respect to recordkeeping services — if recordkeeping services will be provided to the plan, the sponsor must be provided a description of all direct and indirect compensation that the covered service provider, an affiliate, or a subcontractor reasonably expects to receive in connection with such recordkeeping services. Where there is no explicit recordkeeping fee charged, a reasonable and good faith estimate must be provided, taking into account, as applicable, the rates that the covered service provider, an affiliate, or a subcontractor would charge to, or be paid by, third parties, or the prevailing market rates charged, for similar recordkeeping services for a similar plan with a similar number of covered participants and beneficiaries.

E. Manner of receipt — the manner in which the compensation will be received, such as whether the covered plan will be billed or the compensation will be deducted from plan accounts or investments.

F. Special rules with respect to investment disclosure — fiduciary services — if the covered service provider is providing services as a fiduciary to an investment contract in which the plan has a direct equity investment, the following additional information must be provided, unless such information is disclosed to the responsible plan fiduciary by a covered service provider providing recordkeeping services or brokerage services:

1. Sales and termination charges.

2. Operating expenses.

3. Additional information needed for sponsor-participant disclosure. The following are examples of such additional information: identifying information; performance data; benchmarks; fee and expense information for alternatives with respect to which the return is fixed; web site data.

G. Special rules with respect to investment disclosure — recordkeeping and brokerage services — A provider of recordkeeping+investment platform services must provide the information described in F with respect to each designated investment alternative for which recordkeeping or brokerage services will be provided. It may generally do so by providing current disclosure materials of the issuer.

H. Timing

Generally the covered service provider must provide the foregoing information to the responsible plan fiduciary reasonably in advance of the date the contract or arrangement is entered into, extended or renewed.

V. Information provided on request

Generally, upon written request from the responsible plan fiduciary or plan administrator, the covered service provider must furnish any other information relating to compensation that is required for the plan to comply with the reporting and disclosure requirements of ERISA (e.g., required for completion of Form 5500, Schedule C). This information must be disclosed reasonably in advance of the date upon which such responsible plan fiduciary or covered plan administrator states that it must comply with the applicable reporting or disclosure requirement, unless such disclosure is precluded due to extraordinary circumstances beyond the covered service provider’s control, in which case the information must be disclosed as soon as practicable.

VI. Errors

Reasonable good faith disclosure errors are generally not penalized provided that the covered service provider discloses the correct information to the responsible plan fiduciary as soon as practicable, but not later than 30 days from the date on which the covered service provider knows of the error.

VII. Exemption for responsible plan fiduciary

A violation of the new rule may result in a prohibited transaction, and the responsible plan fiduciary, by causing the transaction, may have violated ERISA. The regulation provides an exemption, in certain cases, for such a violation, provided:

The responsible plan fiduciary did not know that the covered service provider failed or would fail to make required disclosures and reasonably believed that the covered service provider disclosed required information;

The responsible plan fiduciary, upon discovering that the covered service provider failed to disclose the required information, requests in writing that the covered service provider furnish such information;

When applicable, a notice shall be filed with DOL not later than 30 days following the earlier of : (1) the covered service provider’s refusal to furnish the required information; or (2) 90 days after the fiduciary’s written request; and

If the covered service provider fails to comply with the plan fiduciary’s written request within 90 days, the responsible plan fiduciary shall determine whether to terminate or continue the contract or arrangement consistent with its duty of prudence. If the requested information relates to future services and is not disclosed promptly after the end of the 90-day period, then the responsible plan fiduciary shall terminate the contract or arrangement as expeditiously as possible, consistent with such duty of prudence.


Part 2 — Sponsor-participant disclosure rules

The regulation describes a new fiduciary standard generally applicable to the plan administrator and subject to ERISA’s general fiduciary sanctions.

Summary —

·         The new regulation requires disclosure of “plan-related” and “investment-related” information to all persons eligible to participate in the plan.

·         Generally, plan-related information is the sort of information that would be routinely included in an SPD.

·         With respect to investment-related information, the rules require, with respect to every investment alternative available under the plan (other than brokerage windows), provision to participants of detailed fee and benchmark information of the sort typically available in a mutual fund prospectus.

·         Investment-related information must be provided in chart form and (with respect to certain information) on a website.

·         Compliance investment-related information rules with respect to separate accounts, collective trusts and other “non-mutual fund” vehicles may be problematic, as this information does not necessarily “pre-exist” in a prospectus, and a website will have to be created.

·         While the existence of revenue sharing arrangements must be disclosed, the plan administrator does not have to identify which funds are subject to revenue sharing.

I. Plan-related information

A. General plan information

How to give investment instructions; plan-based limitations on instructions; rules for the exercise of voting and similar rights; the designated investment alternatives offered under the plan; “brokerage windows” arrangements.

B. Administrative expense information

Administrative fees and how allocated (e.g., pro rata, per capita). Quarterly statement of the dollar amounts actually charged.

C. Revenue sharing

The quarterly statement must (if applicable) include a general explanation that, in addition to the expenses reported on the statement, some of the plan’s administrative expenses for the preceding quarter were paid through revenue sharing arrangements, Rule 12b-1 fees, sub-transfer agent fees, etc.

D. Individual expense information

Administrative expenses that are assessed on an individual-by-individual, rather than plan-wide, basis, e.g., QDROs, loans, fees for investment advice, front or back-end loads or sales charges, redemption fees; and investment management fees attendant to a participant’s investment that are charged directly against the individual account, rather than included in the annual operating expenses of the investment.

As with administrative expense information, affected participants must be provided, at quarterly statements of the dollar amounts actually charged. (Note that this information has to be provided “at least” quarterly; it may be provided in a quarterly statement; alternatively it could be provided in a timely confirmation statement or similar notice.)

II. Investment-related information

The information in items A-H must generally be provided with respect to the plan’s designated investment alternatives. Designated investment alternatives generally include everything in a fund menu — mutual funds, separate accounts, collective trusts, GICs. The only exclusion is brokerage windows, which generally get a pass, although the plan administrator must identify them and disclose any fees and expenses applicable to their utilization.

A. Identifying information

The name and “category” (e.g., money market fund, balanced fund, large-cap stock fund, etc.) of the investment alternative.

B. Performance data

The average annual total return of the investment for: 1-year, 5-year, and 10-year periods (or for the life of the designated investment alternative, if shorter), together with a statement that an investment’s past performance is not necessarily an indication of how the investment will perform in the future.

Here (and elsewhere) there’s a special rule for “fixed return” investment alternatives (e.g., certificates of deposit and GICs). Performance data equals the fixed rate of return; the term of the investment; and (if applicable) a statement that the issuer may adjust the rate of return prospectively and how to obtain (e.g., telephone or website) the most recent rate of return information available.

C. Benchmark data

The name and returns of an appropriate broad-based securities market index over the 1-, 5-, and 10- calendar year periods (or for the life of the alternative, if shorter) comparable to the performance data periods provided for plan funds. With respect to funds that are not benchmarked or are a blend of asset classes (e.g., balanced funds), the plan administrator may blend the returns of more than one appropriate broad-based index, provided that the blended returns proportionally reflect the actual equity and fixed-income holdings of the designated investment alternative.

D. Investment-related fees

1. The amount and a description of each shareholder-type fee (e.g., sales loads and redemption fees).

2. A description of any restriction or limitation that may be applicable to a purchase, transfer, or withdrawal (such as round trip, equity wash, or other restrictions).

3. The total annual operating expenses of the investment expressed as a percentage (e.g., the expense ratio). A “dollar-based” example of the expense ratio must be provided: the total annual operating expenses of the investment for a one-year period expressed as a dollar amount for a $1,000 investment.

4. Statements that fees are only one of several factors that participants should consider when making investment decisions and that “the cumulative effect of fees and expenses can substantially reduce the growth of a participant’s … retirement account and that participants … can visit the Internet Web site of the Employee Benefits Security Administration for information and an example demonstrating the long-term effect of fees and expenses.”

E. Website

A website that includes:

1. The name of the investment alternative’s issuer.

2. The alternative’s objectives or goals in a manner consistent with Securities and Exchange Commission Form N-1A or N-3, as appropriate.

3. The alternative’s principal strategies (including a general description of the types of assets held by the investment) and principal risks in a manner consistent with Securities and Exchange Commission Form N-1A or N-3, as appropriate.

4. The alternative’s portfolio turnover rate in a manner consistent with Securities and Exchange Commission Form N-1A or N-3, as appropriate. (Certain funds, e.g., fixed-return and employer stock funds, are exempted from this requirement.)

5. The alternative’s performance data (as described above) updated on at least a quarterly basis, or more frequently if required by other applicable law.

6. The alternative’s fee and expense information (as described above).

Participants must be furnished information about how to request, and obtain free of charge, a paper copy of the information required to be maintained on a Web site.

F. Glossary

A glossary of investment and financial terms.

G. Chart

The foregoing investment-related information must be provided in chart form, permitting a straightforward comparison of alternatives.

H. Other investment-related information

Under the regulation, fiduciaries must also provide certain pass-through voting information.

III. Timing and method of disclosures

Generally, both plan-related and investment-related information must be provided to an individual on or before the date he or she can first direct investments and at least annually thereafter. Information about charges actually applied to a participant’s account must be disclosed quarterly. Except with respect to the latter information, about actual charges, “fees and expenses may be expressed in terms of a monetary amount, formula, percentage of assets, or per capita charge.”

Plan-related information generally may be provided in a summary plan description. Quarterly information may generally be provided in quarterly statements.

IV. Sponsor liability

The plan administrator is liable for the completeness and accuracy of information used to satisfy these disclosure requirements when the plan administrator reasonably and in good faith relies on information received from or provided by a plan service provider or the issuer of a designated investment alternative.

V. Electronic disclosure of sponsor-participant fee information

Under Technical Release 2011-3, “plan-related” information (e.g., how to give investment instructions, plan-based limitations on instructions, rules for the exercise of voting and similar rights) may be provided under flexible electronic disclosure rules, including reference to a continuous access Web site. Investment-related information generally may be provided electronically only where either: (1) the participant uses a computer in his or her job; (2) the participant explicitly consents; or (3) the participa

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February 2023 Pension Finance Update

In February, pension finances saw positive growth despite falling stock markets, thanks to higher interest rates. The traditional plan, Plan A, improved by 2%, while Plan B saw a fractional improvement, bringing both up to almost 3% and 1% respectively for the year. While stocks lost ground, bonds saw an increase in interest rates and credit spreads, causing losses of 2%-4%, but remaining up by 1% for the year. Pension liabilities are driven by market interest rates, and while corporate bond yields rose by 0.4% in January, pension liabilities fell by 4%-6%. The overall effect in the first two months of the year has been a modest boost for pension finances. However, the increase in rates has eroded the impact of relief from funding requirements, which were relaxed in March and November 2021 legislation. Effective discount rates are expected to be in the range of 4.9%-5.2%, and the table summarizes rates that plan sponsors are required to use for IRS funding purposes for 2023, along with estimates for 2024.