On December 13, 2007, the U.S. Department of Labor issued its proposed rule on 401(k) fee disclosures.

The significant feature of the proposed regulation is its newly announced disclosure requirements. Specifically, the proposed rule requires the following two types of disclosures:

• Disclosure of Services and Compensation.
  
The service provider contract must disclose information regarding all services to be performed and all compensation that will be received either directly from the plan or indirectly from parties other than the plan or plan sponsor.

• Disclosure of Conflicts of Interest.
Service providers also must disclose information about relationships or interests that may raise conflicts of interest for the service provider in performing plan services.

For bundled services, in which a group of services is provided and priced as a package, only the provider of the services would have to make the disclosure. The bundled service provider has to disclose all services and the total compensation or fees to be received, directly or indirectly, by the service provider, any affiliate or subcontractor of such service provider, or any other party in connection with the bundled services. The bundled service provider would not be required to disclose the breakdown of such compensation or fees, unless charged against the plan's investments or are set on a transaction basis.

In general, there are three main categories of expenses. They are:

1. Investments
2. Recordkeeping and compliance
3. Advice, including investment adviser fees and broker's commissions

High fees tend to fall into two categories; expense ratio and wrap fees.

• The first is the expense ratio of one or more of the mutual funds are excessive, which can easily happen as a plan grows. For example, one share class may be right for a small plan, but as plan assets grow, a lower-priced share class may be appropriate. Plan sponsors and their advisors, need to review the fees of their 401(k) plans at least every 2 years, or inadvertently they could be paying excessive fees.
  
• The second common area of excessive investment fees are "wrap" fees. These are fees charged by advisors or providers for services provided to the plan and its participants. A basis point charge is subtracted from the return of the fund to cover these services. While wrap fees may not be inappropriate or overly expensive, they can be. For example, there have been cases where the total annual fees in a group annuity contract are 3% per year, or more. To properly evaluate these fees, the first step for a plan sponsor is to know the total annual fees for their plan. The second is to obtain information on the total fees for plans of similar assets and numbers of participants.

 For fees and commissions for advice, plan sponsors can pay two ways.

• If the payment is made directly by the plan sponsor, the fees tend to stay reasonable because the cost is stated clearly. The plan sponsor will know what they are receiving for the stated price.

• However, with embedded fees or commissions in the investment products, many plan sponsors do not know what they are paying. In those cases, plans often pay too much for the services, possibly hurting their participants. The services required to run a plan do not tend to grow proportionately with the assets. However, many advisors base their fees and commissions on a percentage of the assets in the plan, which is appropriate to a point, but can become overly expensive. Plan sponsors can negotiate the fees or a sliding scale can be set to reduce the fees when certain asset levels in the plan are reached.

Plan provider or record keeper expenses are fixed, vary based on the number of participants, or both. These expenses normally are not based on the assets in the plan. However, plan providers often receive payments, such as 12b-1 fees, sub transfer agency fees and shareholder servicing fees, which are based on a percentage of assets. Eventually a plan grows large enough that it is overpaying. Unfortunately, it is difficult for plan sponsors to know the true costs of recordkeeping. However, plan sponsors should seek the help of an advisor to determine what a fair cost should be.

Part one of the Department of Labors rulings, beginning for the 2009 plan year, provides new fee-related reporting rules that apply generally to "large plans," (plans with 100 + participants). Generally, all direct compensation and, unless exempt under the bundled services rule, all indirect compensation paid to service providers who received payments of more than $5,000 must be reported on Schedule C.

A plan must do the following under the new rules:

1. Report the identity of all persons who receive payments of more than $5,000.
2. Report a code describing the services. The number of codes was expanded for this purpose.
3. Report any relationship of the person identified in rule 1, to the plan sponsor, to the participating employer or employee organization, or to any person known to be a party-in interest.
4. Report the total of direct compensation paid to the person.
5. Report whether the person received any indirect compensation. This is just a yes/no question, and if the answer is no, no more information is required with respect to this person. If the answer is yes, then the plan must further report greater detail.
6. Report whether the person received any eligible indirect compensation.
7. Report the total amount of non-eligible indirect compensation.
8. Report whether the person only provided a formula for determining compensation, as opposed to the actual amount or an estimate.

Please refer to the Form 5500 Annual Report for 2009 and the proposed regulations for section 408(b)2 of the Employee Retirement Income Security Act(ERISA) for complete details.or additional rulings.