February 2, 2012 / 3:45 PM / in 7 years

U.S. requires 401(k) plan clarity on fees

(Reuters) - The Department of Labor unveiled a final 401(k) fee disclosure rule on Thursday that requires plan providers to give more details about what employers pay for retirement plan administration and other services.

The hand of a broker is seen next to a calculator at Multiva Bank in Mexico City August 9, 2011. REUTERS/Carlos Jasso

The enhanced disclosures required by the rule will increase transparency in the retirement plan market and encourage employers who sponsor the plans to “shop around for service providers,” Phyllis Borzi, assistant secretary of the Department of Labor’s Employee Benefits Securities Administration, said on a call with reporters on Thursday.

That will eventually lead to more money in accounts for retirees, she said.

At the same time, the Treasury Department unveiled two rules and two proposals that would make it easier for employees to use their retirement accounts to buy annuities to provide lifetime income streams.

Plan service providers, who have been concerned about meeting an April compliance deadline that was initially proposed for the fee-disclosure rule, will now have until July 1 to make the necessary disclosures, Borzi said.

The fee-disclosure rule will apply to all providers that work with 401(k) plans, such as Fidelity Investments and Vanguard Group. They will have to disclose to employers specifics about their fees, including those for money management, record-keeping and retirement plan administration.

There are harsh consequences for failing to comply: Employers must terminate relationships with providers who do not provide fee information and fail to respond to a written request for details within 90 days, according to Fred Reish, an employee benefits lawyer at Drinker Biddle & Reath LLP in Los Angeles.

“I was surprised to see that in the final rule,” said Reish. “This is the Labor Department’s way of putting pressure indirectly on the service provider community.”

One point won some praise from the industry. Providers, including record keepers and financial advisers, can give plan sponsors a “good faith estimate” of their charges. The industry had argued that many providers receive indirect payments from 401(k) plan sponsors through revenue sharing and rebates, compensation that is difficult to itemize.

Labor, prior to Thursday’s announcement, also delayed a controversial part of its proposed 401(k) fee disclosure rule that would have required retirement plan providers to create a summary document, or “roadmap,” of all their fees for employers.

The Labor Department said it planned to issue a separate proposal in June requiring retirement plan providers to offer a summary document, according to the agency’s regulatory agenda published on January 20.

Many experts worry that in the absence of a roadmap when the fee disclosure rules take effect, employers will be left with a lot of paperwork they do not understand. But plan providers, which include recordkeepers, mutual fund companies and financial advisers, worry that they will be required to create disclosure documents and then revamp them later.

The Labor Department came out with the current version of the rule in July 2010 and gave providers 12 months to comply. After industry opposition, the agency extended the deadline to April 2012. Industry sources were expecting a proposal by the end of January.

Employers and their 401(k) plan providers have been frustrated over the agency’s delay in coming up with its final rule. The long wait stemmed from interest in the rule by the White House, people familiar with the matter said. The Obama administration wanted to demonstrate that it is involved with addressing retirement security issues, they said.

Other rules and proposals introduced by the Treasury Department on Thursday address concerns about enhancing the ability of retirees to control aspects of their savings plans.

One Treasury proposal would give 401(k) savers relief from the minimum distribution requirements that kick in at age 70-1/2 if they instead buy a longevity annuity.

Longevity annuities are deeply deferred. They take a lump sum in exchange for a promise of lifetime benefits that do not typically start until the annuity owner hits age 80 or 85. They are designed to help retirees cover costs if they live a long life.

The Treasury Department also proposed a plan that would make it easier for workers with traditional defined benefit plans to split payouts between lump sums and regular monthly payouts.

It also made final two rules that would help workers buy into their company’s traditional pension with 401(k) funds, and to buy annuities within their 401(k) plans.

The regulatory moves, taken as a whole, are expected to be a benefit for an already booming annuity industry. J. Mark Iwry, the senior Treasury Department official who unveiled the rules, has long favored the idea of smoothing the road for annuities into 401(k) accounts.

Reporting By Suzanne Barlyn and Jessica Toonkel in New York, and Linda Stern in Washington D.C.; Editing by Maureen Bavdek, Gunna Dickson and Tim Dobbyn

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