Category Archives: Fees and Expenses

404(a)(5) Fee Disclosure: When Participant Means All Employees

With the 404(a)(5) fee disclosure deadline approaching fast, I’ve been fielding a lot of questions about what must be disclosed, when it must be disclosed by, and who it must be disclosed to. One of the trickier parts of new Labor Reg. 2550.404a-5 is answering the “who” question.

Labor Reg. 2550.404a-5(b)(1) says:

“In general. The plan administrator of a covered individual account plan must comply with the disclosure requirements set forth in paragraphs (c) and (d) of this section with respect to each participant or beneficiary that, pursuant to the terms of the plan, has the right to direct the investment of assets held in, or contributed to, his or her individual account. Compliance with paragraphs (c) and (d) of this section will satisfy the duty to make the regular and periodic disclosures described in paragraph (a) of this section, provided that the information contained in such disclosures is complete and accurate. A plan administrator will not be 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.”

Normally, it is easy to identify who the participants and beneficiaries are for plan purposes. The plan document contains a definition of each term, and the plan administrator applies that definition when determining who the participants and beneficiaries are for compliance purposes.

For complying with Labor Reg. 2550.404a-5, the Dept. of Labor has thrown a curve at plan administrators. In the preamble to the final regulations, the DOL says:

“Several commenters suggested that the Department clarify, and in some cases modify, the scope of the proposal as to the specific participants and beneficiaries of covered plans to which the rule applies. The proposed rule required disclosures to each participant and beneficiary of the plan that ‘‘pursuant to the terms of the plan, has the right to direct the investment of assets held in, or contributed to his or her individual account.’’ The question presented by the commenters was whether disclosures must be furnished to all eligible employees or only those who actually participate in the plan. Consistent with the definition of ‘‘participant’’ under section 3(7) of ERISA, disclosures must be made to all employees that are eligible to participate under the terms of the plan, without regard to whether the participant has actually become enrolled in the plan.”

A quick check of ERISA section 3(7) reveals that the DOL is correct on this one if you read ERISA section 3(7) very broadly. ERISA section 3(7) says:

“(7) The term “participant” means any employee or former employee of an employer, or any member or former member of an employee organization, who is or may become eligible to receive a benefit of any type from an employee benefit plan which covers employees of such employer or members of such organization, or whose beneficiaries may be eligible to receive any such benefit.”

For more fee disclosure tips and to make compliance easier, we’ve put together a guide to the Final 404(a)(5) Regulations. It combines Labor Reg. 2550.404a-5 with current guidance in a easy-to-follow format along with a self-study module which Enrolled Retirement Plan Agents can complete for continuing education credit.

A 401(k) Participant’s Tale of 404(a)(5) Fee Disclosure

In A 401(k) Fee Secret Revealed, Anne Tergesen writes about receiving her first 404(a)(5) fee disclosure notice. She is still a participant in a former employer’s 401(k) plan, and her 404(a)(5) fee disclosure notice says she paid 0.08% for the investments she selected for her 401(k) account.

Her former employer is the McGraw-Hill Companies. A quick check of Brightscope shows this plan has over 20,000 participants with just over $2 billion in assets in 2010.

Dept. of Labor Revises 404(a)(5) Fee Disclosure Guidance

I have to confess that the DOL’s 404(a)(5) regulations are not among my favorite. There is something about these regulations that make my eyes glaze over, and yet I know I will face more questions from family members at Thanksgiving about these regulations than about anything else happening in plan-land this year. Just when I thought I had read everything to do with these regulations, the Dept. of Labor issued a revised Field Assistance Bulletin 2012-02 yesterday (July 30, 2012), designated as Field Assistance Bulletin 2012-02R. It supersedes Field Assistance Bulletin 2012-02 which was issued on May 7, 2012. (Spoiler Alert: The DOL did not extend the Aug. 30, 2012 disclosure deadline.)

It is interesting that the DOL decided to supersede FAB 2012-02 and issue FAB 2012-02R because FAB 2012-02R only contains 2 changes from FAB 2012-02.

First, Q&A-30 from FAB 2012-02 has been deleted from FAB 2012-02R. Q&A-30 said:

Q-30: A plan offers an investment platform consisting of a large number of registered mutual funds of multiple fund families into which participants and beneficiaries may direct the investment of assets held in or contributed to their individual accounts. Although the plan fiduciary selected the platform provider, the fiduciary did not designate any of the funds on the platform as “designated investment alternatives” under the plan. Is this platform itself a designated investment alternative for purposes of the regulation?

A-30: Paragraph (h)(4) of the regulation specifies that a brokerage window or similar arrangement is not a “designated investment alternative.” A platform consisting of multiple investment alternatives would not itself be a designated investment alternative. Whether the individual investment alternatives are designated investment alternatives depends on whether they are specifically identified as available under the plan. As the Department explained in the preamble to the final regulation (75 FR 64910), when a plan assigns investment responsibilities to the plan’s participants and beneficiaries, it is the view of the Department that plan fiduciaries must take steps to ensure that participants and beneficiaries are made aware of their rights and responsibilities with respect to managing their individual plan accounts and are provided sufficient information regarding the plan, including its fees and expenses and designated investment alternatives, to make informed decisions about the management of their individual accounts. Although the regulation does not specifically require that a plan have a particular number of designated investment alternatives, the failure to designate a manageable number of investment alternatives raises questions as to whether the plan fiduciary has satisfied its obligations under section 404 of ERISA. See generally Hecker v. Deere, 569 F.3d 708, 711 (7th. Cir. 2009). Unless participants and beneficiaries are financially sophisticated, many of them may need guidance when choosing their own investments from among a large number of alternatives. Designating specific investment alternatives also enables participants and beneficiaries, who often lack sufficient resources to screen investment alternatives, to compare the cost and return information for the designated investment alternatives when they are selecting and evaluating alternatives for their accounts.

Further, plan fiduciaries have a general duty of prudence to monitor a plan’s investment menu. See Pfeil v. State Street Bank, 671 F.3d 585, 598 (6th Cir. 2012). If, through a brokerage window or similar arrangement, non-designated investment alternatives available under a plan are selected by significant numbers of participants and beneficiaries, an affirmative obligation arises on the part of the plan fiduciary to examine these alternatives and determine whether one or more such alternatives should be treated as designated for purposes of the regulation.

Pending further guidance in this area, when a platform holds more than 25 investment alternatives, the Department, as a matter of enforcement policy, will not require that all of the investment alternatives be treated, for purposes of this regulation, as designated investment alternatives if the plan administrator—

    (1) makes the required disclosures for at least three of the investment alternatives on the platform that collectively meet the “broad range” requirements in the ERISA 404(c) regulation, 29 CFR § 2550.404c-1(b)(3)(i)(B); and
    (2) makes the required disclosures with respect to all other investment alternatives on the platform in which at least five participants and beneficiaries, or, in the case of a plan with more than 500 participants and beneficiaries, at least one percent of all participants and beneficiaries, are invested on a date that is not more than 90 days preceding each annual disclosure.

Second, the DOL added Q&A-39 to FAB 2012-02R. It says:

Mutual Fund Platforms and Brokerage Windows

Q39: A plan offers an investment platform that includes a brokerage window, self-directed brokerage account, or similar plan arrangement. The fiduciary did not designate any of the funds on the platform or available through the brokerage window, self-directed brokerage account, or similar plan arrangement as “designated investment alternatives” under the plan. Is the platform or the brokerage window, self-directed brokerage account, or similar plan arrangement a designated investment alternative for purposes of the regulation?

A39. No. Whether an investment alternative is a “designated investment alternative” (DIA) for purposes of the regulation depends on whether it is specifically identified as available under the plan. The regulation does not require that a plan have a particular number of DIAs, and nothing in this Bulletin prohibits the use of a platform or a brokerage window, self-directed brokerage account, or similar plan arrangement in an individual account plan. The Bulletin also does not change the 404(c) regulation or the requirements for relief from fiduciary liability under section 404(c) of ERISA or address the application of ERISA’s general fiduciary requirements to SEPs or SIMPLE IRA plans. Nonetheless, in the case of a 401(k) or other individual account plan covered under the regulation, a plan fiduciary’s failure to designate investment alternatives, for example, to avoid investment disclosures under the regulation, raises questions under ERISA section 404(a)’s general statutory fiduciary duties of prudence and loyalty. Also, fiduciaries of such plans with platforms or brokerage windows, self-directed brokerage accounts, or similar plan arrangements that enable participants and beneficiaries to select investments beyond those designated by the plan are still bound by ERISA section 404(a)’s statutory duties of prudence and loyalty to participants and beneficiaries who use the platform or the brokerage window, self-directed brokerage account, or similar plan arrangement, including taking into account the nature and quality of services provided in connection with the platform or the brokerage window, self-directed brokerage account, or similar plan arrangement.

The Department understands plan fiduciaries and service providers may have questions regarding the situations in which fiduciaries may have duties under ERISA’s general fiduciary standards apart from those in the regulation. The Department intends to engage in discussions with interested parties to help determine how best to assure compliance with these duties in a practical and cost effective manner, including, if appropriate, through amendments of relevant regulatory provisions.

To make these changes, and the Final 404(a)(5) Regulations, easier to understand, we’ve put together a new e-book – A Compendium of the Final 404(a)(5) Fee Disclosure Regulations. It includes a copy of Labor Reg. 2550.404a-5 organized by topic along with the DOL’s guidance and explanations about this regulation in an easy-to-follow format. We’ve also created a self-study module around the Compendium so you can earn 2 ntinuing education credits for learning about 404(a)(5) as you read the e-book.

Today in ERISA History

July 31, 1996 – The Dept. of Labor issues Advisory Opinion 96-14A addressing whether the schedule of “usual and customary” fees, which is used as a basis for determining the dollar amount that will be paid for health claims under a welfare benefit plan, must be made available for examination and/or furnished by the plan administrator upon the request of a plan participant or beneficiary. The request for the advisory opinion was made by a plan whose plan document did not contain the schedule of “usual and customary” fees even though the plan provided for the reimbursement of the full cost of medical care incurred by the employee-participants based on a “usual and customary” fee.

The DOL decided that the schedule of “usual and customary” fees are required to be disclosed to participants and beneficiaries by ERISA sections 104(b)(2) and 104(b)(4). ERISA section 104(b)(2) requires a plan administrator to make copies of certain information related to the plan available for examination by any plan participant or beneficiary. ERISA section 104(b)(4) requires this information to be furnished to participants and beneficiaries upon written request and allows plan administrators to impose a reasonable charge to cover the cost of providing these documents.

In a footnote, the DOL states that under their interpretation of Labor Reg. 2520.104b-30, the charge assessed by the plan administrator to cover the costs of furnishing documents is reasonable if it is equal to the actual cost per page for the least expensive means of acceptable reproduction, but in no event may such charge exceed 25 cents per page. Further, the DOL stated that no other charge for furnishing documents, such as handling or postage charges, is considered reasonable.

With technology advancing since 1996 to allow scanning and emailing as the least expensive means of acceptable reproduction, is anyone still charging participants and beneficiaries 25 cents per page?

Fixing a 408(b)(2) Fee Disclosure Failure

By July 1, 2012, most plan fiduciaries and service providers complied with the Final 408(b)(2) Fee Disclosure Regulations by disclosing information about service provider compensation and potential conflicts of interest. For those that didn’t, the Final 408(b)(2) Fee Disclosure Regulations require responsible plan fiduciaries to file a notice with the Dept. of Labor to obtain relief from ERISA’s prohibited transaction provisions. On July 16, 2012, the DOL issued a Final Rule explaining where and how to file that notice.

Effective Sept. 14, 2012, the DOL is setting up a webpage to allow responsible plan fiduciaries to electronically file those notices with the Department. The DOL has also established a new address if the responsible plan fiduciary decides to mail the notice to the Department instead of filing it electronically. In the Final Rule on Amendment Relating to Reasonable Contract or Arrangement Under Section 408(b)(2) – Fee Disclosure/Web Page, the DOL has amended Labor Reg. 2550.408b-2(c)(1)(ix)(F) to add that the notice required by Labor Reg. 2550.408b-2(c)(1)(ix)(C) can be furnished to the DOL electronically in accordance with instructions published by the Department or the notice can be mailed to the DOL at the address contained in the regulation.

After this change, the language of Labor Reg. 2550.408b-2(c)(1)(ix) now says:

    (ix) Exemption for responsible plan fiduciary. Pursuant to section 408(a) of the Act, the restrictions of section 406(a)(1)(C) and (D) of the Act shall not apply to a responsible plan fiduciary, notwithstanding any failure by a covered service provider to disclose information required by paragraph (c)(1)(iv) or (vi) of this section, if the following conditions are met:

      (A) 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 the information required by paragraph (c)(1)(iv) or (vi) of this section;

      (B) 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;

      (C) If the covered service provider fails to comply with such written request within 90 days of the request, then the responsible plan fiduciary notifies the Department of Labor of the covered service provider’s failure, in accordance with paragraph (c)(1)(ix)(E) of this section;

      (D) The notice shall contain the following information—

        (1) The name of the covered plan;

        (2) The plan number used for the covered plan’s Annual Report;

        (3) The plan sponsor’s name, address, and EIN;

        (4) The name, address, and telephone number of the responsible plan fiduciary;

        (5) The name, address, phone number, and, if known, EIN of the covered service provider;

        (6) A description of the services provided to the covered plan;

        (7) A description of the information that the covered service provider failed to disclose;

        (8) The date on which such information was requested in writing from the covered service provider; and

        (9) A statement as to whether the covered service provider continues to provide services to the plan;

      (E) The notice shall be filed with the Department not later than 30 days following the earlier of—

        (1) The covered service provider’s refusal to furnish the information requested by the written request described in paragraph (c)(1)(ix)(B) of this section; or

        (2) 90 days after the written request referred to in paragraph (c)(1)(ix)(B) of this section is made;

      (F) The notice required by paragraph (c)(1)(ix)(C) of this section shall be furnished to the U.S. Department of Labor electronically in accordance with instructions published by the Department; or may sent to the following address: U.S. Department of Labor, Employee Benefits Security Administration, Office of Enforcement, P.O. Box 75296, Washington, DC 20013; and

      (G) If the covered service provider fails to comply with the written request referred to in paragraph (c)(1)(ix)(C) of this section within 90 days of such request, the responsible plan fiduciary shall determine whether to terminate or continue the contract or arrangement consistent with its duty of prudence under section 404 of the Act. 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.

Today in ERISA History

June 27, 2008 – The Dept. of Labor releases Advisory Opinion 2008-05A addressing whether the fiduciary rules of ERISA prohibit the use of plan assets to promote union organizing campaigns and union goals in collective bargaining negotiations.

After discussing the DOL’s general principals that a fiduciary may only consider factors relating to the interests of plan participants and beneficiaries when deciding whether, and to what extent, to make or refrain from making a particular investment, the DOL says that the use, or threat of use, of pension plan assets or plan management to achieve a particular collective bargaining objective is activity that subordinates the interests of participants and beneficiaries in their retirement income to unrelated objectives, and therefore is prohibited.

Today in ERISA History

June 13, 1989 – The DOL issues Advisory Opinion 89-09A, addressing whether employee benefit plans sponsored by Manville Corp. can reimburse the company for direct expenses incurred by Manville in providing administrative and asset management services to the plans without causing an ERISA section 406 prohibited transaction.

Specifically, Manville sought guidance from the DOL on whether they could be reimbursed for the salary and fringe benefits paid to several Manville employees who spent at least 80 percent of their time providing administrative, asset management, or other services to one or more of the 7 employee benefit plans sponsored by Manville. Additionally, Manville wanted reimbursement for all long distance phone calls, travel expenses, mailing costs, and office supplies used by or incurred by those employees as they were providing services to the plan.

The DOL said:

“subject to the limitations of ERISA section 408(d), ERISA section 408(b)(2) exempts from the prohibitions of ERISA section 406(a) any contract or reasonable arrangement with a party in interest, including a fiduciary, for office space, or legal account, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid therefor. Section 408(c)(2) of ERISA provides, in relevant part, that nothing in section 406 shall be construed to prohibit any fiduciary from receiving compensation for services rendered, or for the reimbursement of expenses properly and actually incurred, in the performance of his or her duties with respect to the plan.”

The DOL states that Manville providing administrative and asset management services to the plans would be exempt from the prohibitions of ERISA section 406(a) if the conditions of ERISA section 408(b)(2) are met, noting that the question of what constitutes a necessary service, a reasonable contract or arrangement, and reasonable compensation are inherently factual in nature.

ABC News on 401(k) Fee Disclosure

Today, ABC News ran a segment on the ABC Evening News about the fee disclosure regulations for 401(k) plans which take effect July 1, 2012. The segment was titled “401(k) Hidden Fees” and contains an example of the impact 0.5% fees have on a typical couple’s 401(k) account balance compared to the impact of 1.5% in fees. Phyllis Borzi of the Dept. of Labor appears in the video.

ABC News 401(k) Hidden Fees, May 30, 2012

Today in ERISA History

May 24, 2010 – The United States Supreme Court decides Hardt v. Reliance Standard Life Insurance Co., 560 U.S. __, 130 S.Ct. 2149 (2010), holding that a court “in its discretion” may award fees and costs “to either party” as long as the fee claimant has achieved “some degree of success on the merits.”

Bridget Hardt was working as an executive assistant when she was diagnosed carpel tunnel syndrome. Eventually, due to her illness, she stopped working and applied for long-term disability benefits from her employer’s long-term disability insurance plan, which was administered by Reliance. Reliance initially approved her claim pending the outcome of a functional capacities evaluation. After the evaluation, Reliance denied her claim, finding that she was not totally disabled within the meaning of the plan. Hardt filed an administrative appeal, and Reliance reversed their decision and granted Hardt temporary disability benefits for 24 months. During those 24 months, Hardt was diagnosed with small-fiber neuropathy, and based on that diagnosis, she applied for and was granted Social Security disability benefits.

Reliance notified Hardt that her benefits would expire at the end of the 24-month period due to the earlier finding that she was not totally disabled by her carpel tunnel syndrome. Additionally, Reliance demanded Hardt pay $14,913.23 to offset the disability benefits she had received from the Social Security Administration as required by a plan provision which coordinated benefits with Social Security payments. Hardt paid the offset to Reliance, and filed an administrative appeal regarding the termination of her benefits, which Reliance denied. Hardt then filed a lawsuit against Reliance in the U.S. District Court for the Eastern District of Virginia.

Both Hardt and Reliance filed motions for summary judgment with the district court, which the district court denied. In denying Hardt’s motion for summary judgment, the district court instructed Reliance to review their decision in her administrative appeal within 30 days, at which time the district court would enter judgment in favor of Hardt. After reviewing their decision, Reliance found Hardt eligible for long-term disability benefits and paid her $55,250 in accrued, past-due benefits.

Hardt then filed a motion for attorneys fees with the district court pursuant to ERISA section 502(g)(1), 29 U.S.C. 1132(g)(1), which allows a court, in its discretion, to award reasonable attorney’s fees and costs to either party in a lawsuit involving ERISA.

In deciding whether to award attorneys fees to Hardt, the district court applied a 3-step process in making the determination. The first step was determining whether Hardt was a “prevailing party”. The district court found she was, applied the next two steps in Hardt’s favor, and awarded Hardt attorneys’ fees. Reliance appealed to the U.S. Court of Appeals for the 4th Circuit.

The 4th Circuit reversed, finding that Hardt was not a “prevailing party”, and vacated the award of attorneys’ fees to Hardt. Hardt appealed, and the U.S. Supreme Court reversed the 4th Circuit.

The Supreme Court examined the language of ERISA section 502(g)(1), and found that the statute did not require Hardt to be a “prevailing party” to be awarded attorneys’ fees. The Court said that “a fees claimant must show ‘some degree of success on the merits’ before a court may award attorney’s fees” under ERISA section 502(g)(1), and Hardt had met this standard by persuading the district court that the plan administrator had failed to comply with ERISA guidelines in denying her benefits.

John R. Ates argued for Bridget Hardt before the U.S. Supreme Court. Ann Sullivan of Crenshaw, Ware & Martin, PLC argued on behalf of Ms. Hardt before the U.S. Court of Appeals for the 4th Circuit with Elaine Kathryn Inman joining her on the brief.

R. Ted Cruz of Morgan, Lewis & Bockius LLP argued for Reliance Standard Life Insurance Co. before the U.S. Supreme Court. Joshua Bachrach of Wilson, Elser, Moskowitz, Edelman & Dicker argued on behalf of Reliance before the 4th Circuit.

Opening Shot Fired in the Fee Disclosure Wars

Star Wars had the Clone Wars, and a lawyer at the law firm of Perkins Coie may have marked the beginning of the Fee Disclosure Wars by filing a class action lawsuit against his employer challenging deductions from his paycheck for various items, including deductions made for “mandatory retirement”, contributions made on his behalf to the firm’s cash balance plan and 401(k) matching contributions made on his behalf to the firm’s 401(k) plan.

In an article by William Dotinga in the Courthouse News Service on May 8, 2012 – Lawyer Says Perkins Coie Makes the Staff Bear Its Costs – it says that the lawsuit filed by Harold DeGraff against Perkins Coie on May 4, 2012 alleges Perkins Coie failed to provide employees with accurate and itemized wage statements in violation of California labor laws, and seeks restitution, waiting time penalties, an injunction and damages.

Hat tip to the Courthouse News Service for providing a copy of the Complaint.

Mr. DeGraff joined Perkins Coie in 2007 according to a press release by Perkins Coie stating that “We are thrilled to have Harold on board” said Ed Wes, Menlo Park managing partner. “The strategic growth of our California practices through the addition of high-caliber lawyers will further enhance the legal services we can provide our clients.”

Even though the lawsuit was filed in federal court, it does not currently allege Perkins Coie violated any provision of ERISA. It will be interesting to see if the Complaint is amended after Mr. DeGraff opens his first fee disclosure statement because, if he is not happy about Perkins Coie deducting $859 from his paycheck in 2009 as his contribution to the Perkins Coie cash balance plan, he will probably not be happy when he learns how much of that $859 went to fees and expenses for maintaining and administering the plan.

A quick check of the 2009 Form 5500 Schedule C for the Perkins Coie Cash Balance Plan revealed the plan checked “Yes” on Line 1(a) and stated that the plan paid eligible indirect compensation to:

  • Columbia Wagner Asset Management LLC;
  • The Vanguard Group;
  • Rainer Investment Management, Inc.;
  • T. Rowe Price Associates, Inc.;
  • American Beacon Advisors, Inc.;
  • Harbor Capital Advisors, Inc.

Line 2(i) of the 2009 Form 5500 Schedule H states that the plan paid no administrative expenses, including no professional fees, no contract administrator fees, no investment advisory and management fees, and no other fees.

According to the 2009 Form 5500, the Perkins Coie Cash Balance Plan was originally effective on Jan. 1, 2005 and had 308 participants at the beginning of the 2009 plan year with a total of $23,658,856 in assets at the end of the 2009 plan year.