Disclosure of 403(b) Fees and Expenses

The U.S. Department of Labor has recently proposed modifying the reporting and disclosure requirements for 403(b) plans that are subject to Title I of ERISA. Currently, those plans have extremely limited reporting requirements. While the proposed revisions would not impact government plans (because they are exempt from ERISA), they will include many private sector 403(b) plans, almost all of which hold significant amounts of assets. (The scope of the changes is discussed in Proposed Reporting Changes for 403(b) Plans by Debra Davis beginning on page 2 of this newsletter.)

One of the changes will require disclosure of fees and expenses paid to brokers and other service providers to these plans. The required disclosures are instructive for all 403(b) plan sponsors, including governmental entities, regardless of whether they are subject to ERISA because it reflects information that the fiduciaries of such plans should be requiring from their advisers.

The DOL proposes to require disclosure, beginning for the 2008 plan year, for all ERISA insurance-funded 403(b) plans. Large ERISA 403(b) plans (generally those with 100 or more participants) would also be required to report additional information. In both cases, the reporting would include, among other things, the compensation paid to the plan's advisers. Unfortunately, governmental plans will not be automatically receiving that information. However, as a matter of practice, the fiduciaries and benefits personnel for governmental plans should request similar information from their providers. Providers should be able to give the information to governmental plan sponsors, because they are being required to develop the systems in order to deliver such information to private sector employers.

For insurance-funded 403(b) plans, the following is required:
"... Schedule A [of the Form 5500] requires the plan administrator to report information about each agent, broker, or other person who was paid commissions or fees, including the amount of commissions and fees paid.

"Further, non-monetary forms of compensation, such as prizes, trips, cruises, gifts or gift certificates, club memberships, vehicle leases, and stock awards, must be reported if the entitlement to or the amount of the compensation was based, in whole or part, on policies or contracts placed with or retained by ERISA plans.

"... Similarly, classifying fees or commissions attributable to a contract or policy as 'profit-sharing' payments, delayed compensation, or as 'reimbursements' for various marketing or other expenses would not justify a failure to disclose such amounts."

For larger plans, the Schedule C to the 2008 5500, if adopted as proposed, will require that the following be reported:

"[M]oney or any other thing of value (for example, gifts, awards, trips) paid by the plan or received from an entity other than the plan or the plan sponsor by a person who is a service provider in connection with that person's position with the plan or services rendered to the plan.

"[F]inder's fees, placement fees, commissions on investment products, transaction-based commissions, sub-transfers agency fees, shareholder serving fees, 12b-1 fees, soft-dollar payments, and float income. Also, brokerage commissions or fees (regardless of whether the broker is granted discretion) are reportable whether or not they are capitalized as investment costs."

Note that these changes will require the reporting of both direct and indirect payments. Indirect payments include, for example, revenue sharing paid to any service provider to a plan.

Plan sponsors - especially government plan sponsors that will not automatically receive this information - are well advised to insist on receiving comparable information beginning in the 2007 plan year. In our experience, some 403(b) arrangements charge fees that are much higher than for comparable 401(k) plans. Hopefully, if this information is disclosed in the future, it will favor the providers who are competitively priced and will force other providers to reduce the charges in their products and services. In other words, we believe that transparency will facilitate the efficient operation of the marketplace and, therefore, will help governmental and tax-exempt plan sponsors and their employees.

Disclaimer Required by IRS Rules of Practice:
Any discussion of tax matters contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding any penalties that may be imposed under Federal tax laws.