Fee Disclosure Guidance Provides 403(b)s Comfort

Annuity options are more prevalent in 403(b)s, and many plans offer multiple service providers. More service provider choices may require greater need for employee education because employees will not only need to decide an asset allocation, but must also make a service provider decision.  

However, as it relates to participant disclosures, having an annuity option is not necessarily a challenge, Doug Roggow, director of institutional product management at TIAA-CREF, told PLANADVISER. Variable annuities and guaranteed fixed-income investments align very well with disclosure requirements. Variable annuities, distributed by prospectus, have readily available information and an expense ratio similar to mutual funds.   

For general account products or fixed-income products, the Department of Labor (DOL) acknowledges that for a product with a stated rate of return and term, it is not pertinent to have some type of expense ratio related because the real driver of income is the rate being offered, the term of that rate, liquidity features and any other fees associated with the products. Other fees could include liquidity restrictions because the general account is invested in very long-term investments, and liquidity could require a surrender charge.  

TIAA-CREF has taken the position that it discloses an expense ratio as part of provider disclosures so sponsors can prepare, but as it relates to participant disclosures, it does not provide one, Roggow said.

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The investment options do not present 403(b) sponsors with additional challenges, but the multiple provider structure does. The DOL requires plan-related information in a comparative chart in the same communication to participants, Roggow said. The intention is to help participants make an informed decision about how they direct their investments.  

For provider disclosures, under the 408(b)(2) regulations, the DOL requires plan fiduciaries to receive disclosures from all service providers. But the real effort, according to Roggow, will come when plan sponsors try to determine reasonableness. The opportunity such disclosures provide, however, is that it can be easier to compare service provider relationships among plan providers as a starting benchmark.  

Many in the industry will be trying to help plan sponsors with this effort. For example, TIAA-CREF offers a white paper that outlines a fiduciary best practice for how to determine reasonableness of fees, according to Roggow. The white paper poses four questions:  

• Who is receiving compensation from the plan? 
• What are the fees and expenses associated with the plan? 
• How do fees and expenses compare with other service providers or investment options? 
• Why is the compensation warranted?  

Roggow said it is the last question that addresses the whole concept of value; the lowest price is not necessarily the best, but sponsors should look for a balance of services provided for fees.

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What this Week’s Guidance Says  

The regulations governing 403(b) plans in 2007 led some plan sponsors to decrease the number of service providers offered under the plan, but the plan sponsor does not have the ability to map assets of discontinued vendors, so many plan sponsors questioned how to track down those vendors.   

When the DOL required expanded reporting on Schedule C of the Form 5500, it provided relief from pre-2009 relationships; it also provided that relief for 408(b)(2) provider disclosures with the final regulations issued February 3. The Department has provided that same relief for participant disclosures under 404(a)(5) in its recent guidance in question 2 (see “DOL Issues Additional Guidance for Participant FeeDisclosures"). “This really helps many 403(b) [sponsors],” Roggow said. “It was a logical progression, but it had to be formally articulated before sponsors could rely on it.”  

Question 15 in the guidance relates what information must be furnished relating to a closed fund, Roggow noted. He said that sometimes based on a custodial or annuity contract arrangement, sponsors may not have discretionary authority over a fund; they may not be able to map assets out of a fund it closes to new money. The DOL document says plan sponsors must disclose information about a closed fund because the employee needs to know whether to remain in the fund; however, the guidance says sponsors may choose to disclose this information only to those participants still in the fund. That would help mitigate the confusion of providing the information to all employees, even those without access to closed funds. In addition, it may help plans encourage participants to leave closed funds and discontinued vendors.  

Question 21 addresses whether a plan administrator must provide a single, unified comparative chart or if it can send charts from multiple providers in one participant communication. Roggow said an aggregated disclosure makes for a better participant experience and also aligns better with the intent of disclosures; however, the DOL allows for a paper clip approach.  

“A lot of this is common sense and practical in the application of the regulations, but the DOL does allow for a reliance on a good-faith effort in complying with a reasonable interpretation of the regulation,” Roggow said. “In this first year, we are all in this together and sponsors will be in good shape.”