The Department of Labor’s Employee Benefits Security Administration (EBSA) released in early February its long-awaited final rule on 401(k) fee disclosures, rule 408(b)(2), and in doing so extended the compliance date to July 1.
The rule requires service providers to furnish information which will enable pension plan fiduciaries to determine both the reasonableness of compensation paid to service providers and any conflicts of interest that may affect a service provider’s performance under a service contract or arrangement.
In announcing the final rule, Secretary of Labor Hilda Solis said “the common-sense rule that we are finalizing today will shed light on the true costs of 401(k) accounts and ultimately reward those working hard and saving for retirement.” The rule, she said, and its companion participant-level fee disclosure rule, will greatly increase the level of transparency in retirement plans.”
Phyllis Borzi, assistant secretary of EBSA, added during a conference call with reporters that the businesses that sponsor retirement plans as well as the workers who participate in those plans will now be able to “get better information on associated fees and expenses,” allowing them “to shop around and make informed decisions that will lead to cost savings and a larger nest egg at retirement.”
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EBSA told Investment Advisor in early January that it was confident the final rule mandating service provider-to-employer/plan sponsor fee disclosure under rule 408(b)(2) would be out by the end of January—so the department wasn’t far off. But at the time a DOL spokesperson said that the department hadn’t decided to extend the compliance date beyond April 1.
On the conference call with reporters, Borzi conceded that service providers needed more time to comply so EBSA extended the date to July 1. Borzi warned, however, that service providers not in compliance as of July 1 will be in violation of ERISA’s prohibited transaction rules and subject to penalties under the Internal Revenue Code.
EBSA said the final rule “requires disclosures of direct and indirect compensation certain service providers receive in connection with the services they provide. The rule applies to those service providers that expect to receive $1,000 or more in compensation and provide certain fiduciary or registered investment advisory services, make available plan investment options in connection with brokerage or recordkeeping services, or otherwise receive indirect compensation for providing certain services to a plan.”
Borzi said plans that are covered under the final rule include defined-benefit and defined-contribution plans like 401(k)s. However, it does not cover SEPs, SIMPLEs, IRAs or individual retirement annuities.