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Legislative Issues

Be Prepared: DOL Adds Disclosure Requirements that Impact Most 401k Plans in 2012
By John J. Higgins & Kelly A. Kurtz

As 2012 progresses, new regulations that fall under the Employee Retirement Income Security Act of 1974 (ERISA) will be implemented. Specifically, new disclosure requirements will be included under the following sections:

  • Section 408(b)(2), which requires service providers to furnish information that will enable retirement plan fiduciaries to determine both the reasonableness of compensation paid to service providers and whether those services are being provided to the plan in a fiduciary capacity.
  • Section 404(a)(5), which details exactly what information must be disclosed to plan participants to help them understand plan fees and make informed investment decisions.

In both cases, these updates will have a significant impact on the level of detail that plan communications must have in the future – especially as it pertains to fee disclosures. This applies to all participant directed retirement plans that are subject to ERISA. (Note: This does not include SEP-IRAs, SIMPLE IRAs, IRAs, and certain

Following is a synopsis of the new regulations and what plan administrators can do to prepare.

Section 408(b)(2)

The general purpose of ERISA is to protect 401k participants. The intent of Section 408(b)(2) is for fiduciaries to have access to the information they need to determine if the arrangement with their service provider is reasonable in terms of both services rendered and compensation paid.


Effective July 1, 2012, any service provider entering into an agreement with a covered plan that expects to receive $1,000 or more in direct or indirect payments will be required to provide plan administrators with the following information:

  • A detailed accounting of services rendered, including what and how compensation is being received.
  • A general description of the services provided, as well as whether they are fiduciary in nature or fall under the Investment Advisers Act of 1940, state laws, or any other regulations.


These changes will benefit plan administrators and sponsors in a number of ways. The new regulations will give plan administrators easier access to information. This not only helps them fully comply with ERISA reporting and disclosure requirements, but it also provides the information necessary for evaluating and monitoring providers with greater accuracy. In addition, any potential conflicts of interest would be identified through the description of services that the covered service provider is delivering as well as the compensation being received for those services, both direct and indirect.

Section 404(a)(5)

To enhance transparency, Section 404(a)(5) requires that certain information regarding the plan and its investments be communicated to participants on a regular basis. This includes expense and fee information related to investments, recordkeeping and administration, as well as available investment choices.


The plan administrator, sponsor, or employer is responsible for making all disclosures to participants. The initial disclosure must be made on or before August 30, 2012. Quarterly disclosure statements must then be made 45 days after the close of the quarter. The initial quarterly communication must be made no later than November 14, 2012.

Quarterly disclosures should include:

  • Any features of the plan that effect the investment of participant accounts.
  • Administrative expenses charged to the plan that are deducted from all participant accounts such as legal, accounting, and recordkeeping services.
  • Individual expenses and fees charged against specific accounts for plan loans, investment advice, brokerage windows, commissions, etc.

Information regarding investment choices should be provided annually, as well as on or before the date plan participants can make direct investment decisions. This includes performance data, benchmark information, fees, and expenses. More detailed investment information must also be posted on the web for participants who want a deeper level of understanding. For those without Internet access, clear instructions on obtaining more information must be provided in disclosure statements.


The goal of these new regulations is to help plan participants maximize and protect retirement savings by providing the information they need for making knowledgeable decisions about the management of their 401k accounts.

Getting Ready

As with any type of change in regulations, it is always best to seek advice to ensure you are in the position to fully comply from the outset. At a minimum, plan administrators, sponsors, and/or employers should begin by gaining a full understanding of the requirements and check with their existing service providers to see how they can assist in meeting these disclosure requirements. This will help uncover any gaps and allow adjustments to be made as needed to service contracts. As it relates to disclosures in particular, you should also:

  • Clearly define disclosure obligations.
  • Ensure that all information needed for disclosures is readily available.
  • Develop a communication strategy for creating and sending disclosures.

In addition, the information sent in the initial disclosures will either be new to plan participants or presented in a different format from what they are used to seeing. As such, it may be advisable to send one or more communications in advance to describe what will happen and illustrate how information will be presented. Regardless, there are likely to be many questions due to the higher level of detail provided regarding fees and expenses related to plan administration. As a result, plan sponsors will need to have a solid understanding of what expenses have been incurred and why.

Since the construction industry was one of the hardest hit in the recession, a participant’s investment in a 401k is more valuable than ever. With this, you may also benefit from focusing on the range of services provided in context with the overall value of the plan in ongoing disclosures.


Failure to comply with Section 408(b)(2) or 404(a)(5) is a breach of fiduciary responsibility. If the disclosures are not made, all fees paid by the plan are automatically considered unreasonable, which is a prohibited transaction. A prohibited transaction could result in financial consequences that may include, but are not limited to, the payment of excise taxes, possible participant lawsuits, and even termination of the plan.

John J. Higgins, CFP, AIF, CFS, is Managing Partner at Patterson Smith Associates, LLC and a Retirement Plan Consultant with Commonwealth with more than 20 years’ experience in the financial services industry. He can be reached at 800-572-8859 or

Kelly A. Kurtz, CPC, QPFC, QPA, is Director of Retirement Services at Patterson Smith Associates, LLC. She spent much of her career designing and implementing 401(k) plans for employers as well as managing the overall process of plan operations and administration. She can be reached at 800-572-8859 or

3% Withholding Rule Repealed

Was Set to Go into Effect in 2013
By Al Clark

President Obama signed the 3% Withholding Repeal and Job Creation Act (HR 674) on November 21, 2011, permanently repealing a previous law’s onerous provision requiring federal, state, and local governments to withhold 3% of all payments for goods and services exceeding $10,000 to all contractors and vendors. The original 2005 measure was never enacted due to repeated delays by Congress and regulators; recent bipartisan support merged with Washington’s current focus on jobs creation and the health of our economy to propel the repeal legislation forward.

The repeal was the result of a concerted effort of countless organizations representing myriad industries. CFMA, along with many other leading construction and industry organizations, is a member of the Government Withholding Relief Coalition, which sought to persuade Congress to permanently repeal the controversial provision, hidden in fine print within 2005’s Tax Increase Prevention and Reconciliation Act.

The provision mandated withholding 3% of billings which, combined with a typical 5-10% retainage in an economic climate marked by no or very low single-digit profits, would have had a devastating effect on the cash flow of every construction contractor doing business with federal, state, and local governmental entities. The industry also noted the detrimental effect of the law on construction employment in the current fragile economy. Governmental entities would have also been hurt by the likely increased costs of goods and services adjusted to offset the federal government’s mandated withholding.

The withholding requirement was opposed by virtually all industries doing business with the government. The law’s original intent was to assure that companies doing business with the government paid their taxes, but it applied across the board to all companies, including those already in compliance with their income tax payments and those that did not pay income taxes, such as partnerships and S corporations. The new legislation also includes the VOW to Hire Heroes Act, which establishes a number of new training programs and tax incentives for employers to hire American service veterans.

Alan K. Clark, CPA, is a Partner at Smith, Adcock and Company, CPAs, in Atlanta, GA. He has more than 38 years of experience in public accounting, with a specialty in the construction industry. He can be reached at 404-252-2208 or


§460 IIR Update Requested

On March 1, 2010, ABC, AGC, and CFMA submitted two letters to the IRS requesting an update on §460 of the Industry Issue Resolution program (IIR). The commercial construction industry’s goal is to get the IRS to finally enact the clarifications that were set forth in the proposed regulations.

cf_entry.jpgIn August 2008, the IRS issued proposed regulations and held a hearing in December 2008. CFMA submitted an opinion letter for that hearing in support of the proposed clarifications to §460 proposed regulations.  Since then, nothing has occurred regarding those proposed regulations. Then, in September 2009, Industry Directors Directive No. 2, Super Completed Contract Method was issued and countermands key provisions in the proposed regulations.

The letters submitted to the IRS by the ABC, AGC, and CFMA expressed that it is “poor policy to enable and encourage field auditors to pursue issues which are contrary to proposed regulations that have been published and generally well accepted by taxpayers and interested stakeholders.” 

George Parrott, CFMA’s Tax & Legislative Committee Co-Chair, states, “The Committee will do its best to keep our members up-to-date on any changes or advancements that occur.”

Letter to Keith Jones, Director Natural Resources and Construction

Letter to Kathleen Krutchen, Territory Manager, LMBS Natural Resources and Construction