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New 401(k) Disclosure Law Creating Issues for Advisors and Clients

Published on September 12, 2012

Have you heard about the new 401(k) Disclosure Law?

A new 401(k) Disclosure Law being implemented by the IRS had clients and advisors scrambling to meet the August 30, 2012 deadline. Under the new federal regulation for retirement plan participants, information on mutual funds, related fees, performance, and other details must be provided to increase transparency.

In an article by Financial Advisor, the goal of instituting section 408(b)(2) is to provide full fee transparency for plan sponsors, participants, and beneficiaries. It will allow clients to know exactly what services they are provided, and how much those services are costing them.

On July 16, 2010, the Employee Benefits Security Administration (under the Department of Labor) published an interim final rule to take effect April 1, 2012. The final rule mandated that fee initiatives include Covered Service Provider (CSP) Disclosure and Participant Fee Disclosure. Since the final rule was a bit unclear for some individuals and firms, the DOL extended the effective date to July 1, 2012 and provided a bit more clarification, citing a “good faith effort to comply.”

The final rule creates “specific disclosure obligations to ensure that retirement plan fiduciaries and plan participants and beneficiaries are provided information to make better decisions pertaining to services performed and fees that are incurred.”

According to the article, “The first round of the regulation was the CSP Disclosure requirement to be furnished to plan sponsors by July 1, 2012. In short, the rule applies to qualified retirement plans subject to Title 1 of ERISA (the Employee Retirement Income Security Act of 1974). Service providers that expect to receive at least $1,000 in compensation must disclose information outlining the services agreed on by both parties, all expenses that will be incurred, and how those expenses will be paid to plan sponsors. Those expenses include not only the CSP fees but any mutual fund expenses that the CSP will receive.”

Fortunately, the majority of service providers were in compliance by the extended deadline of July 1, 2012. However, service providers that were not in compliance as of this date are now subject to the prohibited transaction rules of ERISA section 406 and Internal Revenue Code section 4975 penalties. Some providers may even face a fiduciary breach.

The article also stated that, “Round two will provide for participant-level disclosures. According to the DOL Fact Sheet, for calendar year plans, the initial annual disclosure of ‘plan-level’ and ‘investment-level’ information must be furnished to plan participants and beneficiaries no later than August 30, 2012. Some of the information required is, but is not limited to: services provided, specific mutual fund information (including any related fees), mutual fund performance, and access instructions to obtain information about investment options. Following the annual disclosure, the first quarterly statement must be provided no later than November 14, 2012, outlining the fees debited from the participant or beneficiaries account from July through September. The sponsor must provide this disclosure at least quarterly thereafter. The DOL provided sample CSP and participant-level disclosures to assist CSPs with compliance.”

Although this Disclosure Law is creating extra work for service providers, firms, and individuals, it is meant to assist in making fee charges more transparent in the end. If you have any questions or concerns about the new 401(k) Disclosure Law, please do not hesitate to contact your financial advisor or an ERISA attorney.

To read the full article on Financial Advisor, click here.

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