Guest Article

(From the October 15, 2007 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

DOL Outlines Upcoming 401(k) Fee Regulations During Testimony Before House Committee

The Department of Labor's Employee Benefits Security Administration (EBSA) is moving ahead with a series of regulatory initiatives to make 401(k) plan fees more transparent to plan participants, fiduciaries, government regulators, and the general public. Testifying before the House Committee on Education and Labor on October 4, 2007, DOL Assistant Secretary for EBSA Brad Campbell said updated Form 5500 disclosure requirements are imminent and proposed regulations on disclosures by service providers to plan fiduciaries are not far behind. Campbell also urged Committee members to proceed cautiously on related legislation introduced by Chairman George Miller (D-CA).

Assistant Secretary Campbell said EBSA is seeking to enhance and improve disclosures on three separate, but interrelated, fronts. This comprehensive approach is intended to enable plans to get information about fees from their service providers so they can disclose that information to participants, the government, and the general public. Because EBSA does not have jurisdiction over mutual funds and other financial service providers it is coordinating its efforts with the Securities and Exchange Commission (SEC).

Disclosures by Financial Service Providers to Plan Fiduciaries

As noted, the EBSA cannot impose disclosure requirements on financial service providers. That is the SEC's job, and it has indicated a proposed regulation might be forthcoming. However, EBSA does have the authority to tell ERISA plan fiduciaries what information they must obtain from service providers before entering into or renewing contracts with those providers. The basis for the EBSA's authority in this regard is ERISA § 408(b)(2), which provides a prohibited transaction exemption for "reasonable" contracts with service providers.

According to Assistant Secretary Campbell, the EBSA is developing proposed regulations to "ensure that service providers entering into or renewing contracts with plans disclose to plan fiduciaries comprehensive and accurate information concerning the providers' receipt of direct and indirect compensation or fees and the potential for conflicts of interest that may affect the provider's performance of services. The [EBSA] believes that such disclosures are critical to ensuring that contracts and arrangements are 'reasonable' within the meaning of the statute."

The EBSA's proposed regulation is "under review within the Administration." Presumably it will be released as soon as that process is complete.

Disclosures by Plans to Participants

Still under development is a proposed regulation that would enhance the required disclosures to participants in participant-directed 401(k) and other individual account plans. The proposal will be based in part on comments EBSA received in response to a Request for Information ("RFI") it issued earlier this year. Among other things, the RFI asked for comments on a Government Accountability Office ("GAO") recommendation that plans be required to provide participants "a summary of all fees that are paid out of plan assets or directly by participants." The goal is to ensure "participants have concise, readily understandable information they can use to make informed decisions about the investment and management of their retirement accounts."

Again, the EBSA is working with the SEC "to develop a framework for disclosure of information about fees charged by financial service providers, such as mutual funds, that would be more easily understood by participants and beneficiaries."

Disclosures by Plans to the Government and General Public

The third piece of EBSA's initiative is the closest to being complete. According to Assistant Secretary Campbell, "EBSA will shortly promulgate a final regulation revising the Form 5500 Annual Report filed with the Department to complement the information obtained by plan fiduciaries as part of the service provider selection or renewal process." The EBSA initially issued proposed revisions to the Form 5500 in July 2006, and then updated those proposals to reflect the Pension Protection Act ("PPA") of 2006. Those proposed changes would, among other things, modify Schedule C ("Service Provider Information") to "more specifically define the information that must be reported concerning the 'indirect' compensation service providers received from parties other than the plan or plan sponsor, including revenue sharing arrangements among service providers to plans."

The EBSA expects to issue final Form 5500 modifications in mid-October.

Critique of H.R. 3158

Beyond touting the EBSA's ongoing efforts to make 401(k) plan participants better aware of investment fees and expenses, Assistant Secretary Campbell also raised concerns about Chairman Miller's "401(k) Fair Disclosure for Retirement Security Act" (H.R. 3185). After acknowledging the "common goal of providing increased transparency of fee and expense information," Campbell asserted the "very detailed scope of H.R. 3185's disclosure requirements could result in many participants ignoring the complicated disclosures." He also took issue with the bill's requirement for EBSA to dictate a "mandatory investment option for all participantdirected individual account plans."

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2007, Deloitte.