New DOL Disclosure Rules Include Indirect Providers


New York, NY – According to speakers at the FundForum USA 2010 conference held in Boston on November 1, the Department of Labor’s new 401(k) fee disclosure requirements slated to take effect on January 1, 2012, will do more than just require plans to disclose mutual fund performance and expense ratios.  Instead, the new rules will also mandate that retirement plan providers must provide detailed disclosures to plan sponsors of all indirect expenses associated with these plans including commissions, soft dollars, finder’s fees, 12b-1 fees, among other fees.

These comments are based on an interim final rule issued by the Department of Labor on July 16, 2010 requiring that service providers to defined benefit and defined contribution pension plans disclose direct and indirect fee information to the fiduciaries of these plans. According to the DOL, the purpose of the interim final rule is to assist plan fiduciaries in assessing the reasonableness of compensation for plan services and conflicts of interest affecting plan service providers.

Jessica Flores, managing partner with Fiduciary Compliance Center, explained that the DOL’s new rules will require pension plans to report compensation of $5,000 or more they pay to direct service providers on Schedule C of Form 5500. For indirect service providers earning $1,000 or more, plans may either report the figure or provide the formula they use to calculate compensation.

“The new DOL requirements go far above disclosing an expense ratio to cover all direct and indirect compensation [paid out] by the plan to service providers, affiliates and subcontractors. It’s very different from just the expense ratio,” Flores said. “It applies to revenue sharing, securities lending, brokerage transactions, spreads on structured investment vehicles, and spreads on guaranteed investment contracts in stable value funds.  The DOL has really said it wants all indirect disclosure. That also means soft dollars, commissions, finder’s fees, 12b-1 fees, ongoing expenses such as wrap fees—even termination fees.”

In addition to reporting the fees paid by the plan to service providers, plan providers must also supply a written description of the services that each of the vendors provides to them.

Among other things, this means that pension plan providers will be required to report what they received for the soft dollar commissions they paid out, and the fees they paid for these services.  For clarification purposes, the SEC defines soft dollars as all commissions that are paid out which are in excess of the lowest cost of execution.  Under Section 28(e) of the Exchange Act, the SEC has permitted asset managers to use soft dollar commissions to pay for approved execution and research services. 

We suspect that the new DOL rules will require that pension plan providers disclose what they paid to broker-dealers through bundled commission arrangements for the research they provided to them.  This will mean that plan providers will have to determine what they implicitly paid for this research.

It’s no wonder why some in the investment management industry think the DOL’s new 401(k) fee disclosure rules are likely to be so consequential.


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