Expense Ratio Changes and Notice Requirements

A recent call with a financial advisor in Pennsylvania is representative of a common question on fee changes.

Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans, and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security, and Medicare. This is where we highlight the most relevant topics affecting your business.

“Does a reduction in an investment’s expense ratio require advance notice to participants under the ERISA §404a-5 regulations?”

Highlights of the Discussion

Disclosure rules for a plan’s investment-level expense ratios do not fall under the advance notice rules for participants. Instead, they are covered in the “comparative chart” rules, addressed in the following paragraphs. There, we see that plans generally do not need to issue a new comparative chart when an expense ratio changes during the year. However, the plan should update the fee-and-expense information available through its website as soon as reasonably possible.

As a review, DOL Reg. §2550.404a‑5 advance‑notice requirement applies only to changes in specified plan‑related information and certain administrative or individual expenses that generally must be disclosed 30 to 90 days before they take effect. For fee changes, the relevant advance-notice provisions are:

• 29 CFR §2550.404a-5(c)(2)(i)(B) – plan‑wide administrative expenses

• 29 CFR §2550.404a-5(c)(3)(i)(B) – individual participant‑level fees

The types of plan-wide administrative expenses requiring advance notice under 29 CFR §2550.404a-5(c)(2)(i)(B) include the following, when charged against participant accounts and not reflected in a designated investment alternative's (DIA’s) total annual operating expenses:

• Recordkeeping fees

• Legal fees

• Accounting fees

• Trustee fees

• Other plan-wide administrative expenses charged to participant accounts

• The method of allocating those expenses (e.g., pro rata vs. per capita)

The types of participant-specific fees requiring advance notice to participants under 29 CFR §2550.404a-5(c)(3)(i)(B) include the following, when charged against a participant's account and not reflected in a DIA’s total annual operating expenses:

• Loan origination fees

• Loan maintenance fees

• QDRO processing fees

• Brokerage window fees

• Investment advice fees

• Distribution processing fees

• Redemption fees

• Transfer fees

• Commissions

• Sales charges

• Optional annuity rider charges

Expense Ratio Notice Requirements Are Covered Separately

However, the disclosure rules for investment-level expense ratios do not fall under either of the sections described above. Instead, they are addressed as part of the investment-related disclosures under: 29 CFR §2550.404a-5(d), including §2550.404a-5(d)(1)(iv)(A)(2).

These disclosures are presented in the comparative format required by §2550.404a-5(d)(2), which includes:

•  Performance data

• Benchmarks

• Expense ratios and cost per $1,000 invested

• Shareholder fees

• Website and glossary information

The disclosure frequency requirements under §404a-5(d) are summarized in the table below:

*Although not explicitly included in the text of the final regulations, in response to comments, the DOL indicated in the background information for the final regulations “an expectation that the information made available via the website will be accurate and updated by the plan administrator, service provider or the issuer of a designated investment alternative as soon as reasonably possible following a change, or notification thereof.” (See 75 Fed. Reg. 64920 and DOL FAB 2012-02R, Q&A 22; 29 CFR §2550.404a-5)

Conclusion

Absent a separate plan provision or service provider communication requirement, a change in an investment's expense ratio generally does not require a special 30-to-90-day advance notice or a new comparative chart. The plan's required website information, however, should be updated as soon as reasonably possible to reflect the change, and the revised expense ratio should be included in the next required comparative chart. While communicating such changes may be a participant-friendly best practice, the §404a-5 regulations generally do not require advance notice solely because an investment option's operating expenses have changed.