New Rules to Shed More Light on US DC Plan Provider Fees

This spring and early summer will be a busy time for US defined contribution plan sponsors and providers, but to a good end: greater clarity on services and fees.

The US Department of Labor (DOL) recently published its final rules governing the disclosure of fees for services provided to defined contribution (DC) plan sponsors. The rules will usher in a new level of transparency, which will help plan sponsors understand and evaluate the service fees their plans are paying.

The final 408(b)(2) rules take effect July 1, 2012, after following a winding road that began during the Bush administration. Service providers—in both new and existing relationships—have just a few months to comply with the new disclosure requirements.

The goal of the legislation is to ensure that plan fiduciaries truly understand the costs and compensation agreements of their service providers. Dan Notto, our firm’s Senior Retirement Plan Counsel, says plan sponsors should ask themselves a few key questions:

  • What are the fees?
  • How reasonable are they?
  • Do they create conflicts of interest?
The requirements extend beyond direct fees to indirect fees, such as revenue-sharing arrangements from other parties, including 12b-1 fees, and the required information gets very granular. We think that indirect compensation will be a major area of focus for the DOL as it examines plan providers.

The stakes are high. Failure to determine whether fees are reasonable and take any necessary actions results in a “prohibited transaction,” a breach of fiduciary duties that can result in major penalties for providers.

For plan sponsors, the first step is to obtain all relevant information from service providers. If providers aren’t forthcoming with information, the plan sponsor may eventually have to terminate the relationship.

Ignorance isn’t bliss. The DOL states in the final rules: “If responsible plan fiduciaries need assistance in understanding any information furnished by the service provider, as a matter of prudence, they should request assistance, either from the service provider or elsewhere.”

This is where we think retirement plan professionals—consultants and financial advisors—can help plan sponsors. Fee arrangements have to be interpreted and analyzed. To determine whether fees are reasonable, it’s important to understand how much other plan sponsors pay. Potential conflicts of interest among service providers have to be explored—and resolved, if necessary. In some cases, plan sponsors may want assistance in finding new providers.

These new rules should bring an era of greater transparency to retirement plan fees. But they also require closer collaboration among plan sponsors, service providers and retirement professionals.

In a future post, I’ll discuss companion legislation, 404(a)(5), which governs disclosure to participants.

Seth Masters

Chief Investment Officer—Bernstein
Seth Masters is Chief Investment Officer of Bernstein. He heads the team that provides customized wealth-planning advice and manages the firm’s private client portfolios. Masters was previously CIO for Asset Allocation, overseeing the firm’s Dynamic Asset Allocation, Target Date, Target Risk and Indexed services. In June 2008, he was appointed head of AllianceBernstein’s newly formed Defined Contribution business unit, which has since become an industry leader in custom target-date and lifetime income portfolios. Masters became CIO of Blend Strategies in 2002 and launched a range of style-blended services. From 1994 to 2002, he was CIO of Emerging Markets Value Equities. He joined Bernstein in 1991 as a research analyst covering global financial firms. Masters has frequently been cited in print and appeared on television programs dealing with investment strategy. He has published numerous articles, including “The Case for the 20,000 Dow”; “Long-Horizon Investment Planning in Globally Integrated Capital Markets”; “Is There a Better Way to Rebalance?”; and “The Future of Defined Contribution Plans.” Masters worked as a senior associate at Booz, Allen & Hamilton from 1986 to 1990 and taught economics in China from 1983 to 1985. He holds an AB from Princeton University and an MPhil in economics from Oxford University. He is fluent in French and Mandarin Chinese. Location: New York

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