DOL Issues Final Service Provider Fee Disclosure Regulations
Guidance Extends Compliance Date for Fee Disclosure for 401(k) and Other Plans
The Department of Labor's Employee Benefits Security Administration (DOL) recently issued final regulations
addressing the service provider fee disclosure requirements to covered plans. These rules, originally issued as an interim final rule, are intended to ensure plan fiduciaries are provided with information necessary to (i) make informed decisions when choosing and monitoring service providers (i.e., whether the service provided is of value to the plan and whether the level of compensation paid for the service is reasonable) and (ii) comply with the new participant-level fee disclosure requirements. For a summary of the participant-level fee disclosure rules, view our bulletin.
Extended Compliance Dates
The effective date of the final service provider fee disclosure regulations is extended to July 1, 2012, for both new and existing contracts with service providers. The extension of the effective date for the service provider fee disclosures effectively extends the compliance date for the participant-level fee disclosures for plan administrators of calendar year plans until:
Aug. 30, 2012 – For the initial annual participant-level fee disclosure of "plan-related" and "investment-related" information (including associated fees and expenses), and
Nov. 14, 2012 – For the first quarterly participant-level fee disclosure statement (for fees incurred July through September 2012).
Plans Subject to the Service Provider Fee Disclosures
In general, these rules apply to "covered service providers" (i.e., fiduciaries, investment advisors, recordkeepers and certain other consultants who enter into contracts with covered plans and reasonably expect more than $1,000 in direct or indirect compensation). A "covered plan" is limited to ERISA-covered defined benefit and defined contribution plans (including 401(k) plans), but excludes SEPs, SIMPLE accounts, IRAs and certain 403(b) plans.
Impact on Responsible Plan Fiduciaries of Covered Plans
The final service provider fee disclosure regulations emphasize the role of the "responsible plan fiduciary" in obtaining accurate and complete information. Once the responsible plan fiduciary is provided with the disclosures, it must consider whether the compensation is reasonable and identify any potential conflicts of interest, each of which may impact the on-going provision of such services. To assist in this process, the final regulations:
contain a sample guide that service providers can use to help plan fiduciaries understand and locate the complex information that the service provider will be supplying; and
provide some prohibited transaction relief to responsible plan fiduciaries who do not timely receive the required service provider fee disclosures and require such fiduciaries, after making a written request for the information and not receiving a timely response, to notify the DOL and, in accordance with its "duty of prudence," to consider whether to terminate the contract. The regulation continues by stating that if the requested information relates to future services, the plan fiduciary "shall terminate the contract or arrangement as expeditiously as possible, consistent with such duty of prudence."
Below are a few additional highlights of other changes between the final regulations and the interim regulations:
The compensation information a service provider must initially disclose has been revised to enhance the description of "indirect compensation" to include the arrangement associated with the indirect compensation. The purpose of this change is to help the plan fiduciary recognize potential conflicts of interest.
The deadline for disclosing all investment-related information has been changed to "at least annually." Previously, such information was required to be disclosed within 60 days. Generally, initial disclosures must still be provided "reasonably in advance of the date of the contract."
The final rule clarifies that if a service provider inadvertently provides incorrect information to the "change" portion of the required disclosure it will be treated as part of the "error disclosure" rule. This means errors or omissions with regard to disclosing these changes should be corrected as soon as practicable and no later than 30 days after the error or omission is discovered.
The final regulation also includes an enhanced disclosure requirement for expense ratios and other cost data related to designated investment alternatives. The purpose of the additional expense disclosure is to mirror the requirement plan fiduciaries have to participants under the participant fee disclosure regulations. The service provider disclosure will greatly facilitate getting the data to the ultimate end user.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.