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DOL issues final regulation mandating retirement plan fee disclosure
July 28, 2010
ERISA Fiduciary Alert
Author(s): Thomas J. McCord, Eric Paley

The DOL has issued a final regulation that will require retirement plan service providers to disclose detailed fee and expense information to plan fiduciaries. Though the regulation does not take effect until July 16, 2011, both plan fiduciaries and service providers are advised to start reviewing their written contracts now to ensure compliance by the deadline.

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Employers that sponsor retirement plans have been under increasing pressure for years to monitor the fees being charged against plan assets and accounts of retirement plans. Performing this important fiduciary review has been a challenge, given both the complexity and lack of transparency of revenue-sharing arrangements between investment funds and recordkeepers. Plan fiduciaries have, at times, been left to guess exactly how much the providers of investment and recordkeeping services are being paid from plan assets.

Recently, however, the Department of Labor (DOL) issued an interim final regulation that changes the rules of the game. The regulation takes effect on July 16, 2011. In advance of that date, both plan fiduciaries and service providers are urged to revisit their written contracts to ensure compliance by the effective date.

By way of background, an arrangement between a retirement plan and a service provider is considered to be a prohibited transaction under ERISA unless the arrangement satisfies certain criteria:

  1. the contract must be reasonable;
  2. the services must be necessary for the establishment or operation of the plan; and
  3. no more than reasonable compensation must be paid for the services.

The new regulation addresses the last of these three conditions by requiring service providers to disclose specified information to a responsible plan fiduciary—that is, a fiduciary with authority to enter into, extend, or renew a service arrangement on behalf of the plan.

Highlights of the new regulation are as follows:

Covered plans. The final regulation applies to defined contribution and defined benefit plans governed by ERISA. It does not apply to welfare plans nor does it apply to IRAs, SEPs, or SIMPLEs.

Covered service providers. The final regulation reaches any of three types of service providers that enter into a contract or arrangement with the covered plan and reasonably expects to receive $1,000 or more in compensation, direct or indirect, in connection with providing one or more specified services These are:

  1. a provider who provides services as a fiduciary directly to the plan; as a fiduciary to certain investment contracts, product, or entity that holds plan assets and in which the covered plan has a direct equity investment; or as a registered investment adviser;
  2. a provider of recordkeeping or brokerage services to a participant-directed individual account plan, if one or more designated investment alternatives will be made available in connection with the services; and
  3. a provider of accounting, auditing, actuarial, appraisal, banking, consulting, custodial, insurance, investment advisory, legal, recordkeeping, securities or other investment brokerage, third-party administration, or valuation services to the plan for which the provider reasonably expects to receive indirect compensation.

Substance of initial disclosure. The final regulation requires the service provider to disclose, in writing, seven types of information to the responsible plan fiduciary:

  1. a description of the services to be provided;
  2. if applicable, a statement that the covered service provider, an affiliate, or a subcontractor will provide, or reasonably expects to provide, services directly to the covered plan as a fiduciary or registered investment advisor;
  3. a description of the various forms of compensation to be received by the service provider, an affiliate, or a subcontractor, including direct compensation, indirect compensation, compensation paid among related parties on a transaction basis or charged directly against the investment as reflected in the net value of the investment, and termination charges;
  4. where recordkeeping services will be provided, a description of all direct and indirect compensation the provider reasonably expects to receive from those services, and a good-faith estimate of the cost to the covered plan for such services to the extent that compensation is not explicit;
  5. a description of the manner in which the compensation will be received;
  6. in the case of a provider providing services as a fiduciary to certain investment contracts, product, or entity that holds plan assets and in which the covered plan has a direct equity investment, certain additional information concerning compensation to be charged directly against the amount invested, a description of the annual operating expenses where the return is not fixed, and a description of any ongoing expenses in addition to annual operating expenses; and
  7. as to a registered investment advisor, certain additional information for each designated investment alternative for which recordkeeping services or brokerage services will be provided.

Form of initial disclosure. Although the regulation requires that information be disclosed in writing, it does not require that the fiduciary enter into a formal written contract or arrangement with the service provider. That said, the DOL believes that setting forth the provider’s disclosure obligations in writing “will help ensure that both the responsible plan fiduciary and the service provider clearly understand their respective responsibilities for purposes of compliance with the statutory exemption.” The regulation does not require that disclosures be made in any particular manner or format, although the DOL is considering whether some sort of one- to two-page summary disclosure statement would be of value in the future.

Timing of initial disclosure. The final regulation requires that a covered service provider provide the initial disclosures to the responsible plan fiduciary reasonably in advance of entering into, extending, or renewing the contract or arrangement. An exception exists for a provider acting as a fiduciary to certain investment contracts, products, or entities that hold plan assets and in which the covered plan has a direct equity investment. In instances where the plan invests in a contract, product or entity (such as a private equity fund) that, at the time of investment, does not hold plan assets but is subsequently determined to do so, the provider must make the required disclosures as soon as practicable, but not later than 30 days from the date on which the service provider knows that the investment contract, product, or entity holds plan assets. There is a special timing provision for disclosures related to certain recordkeeping and brokerage services by registered investment advisors.

Changes to initial disclosure information. A covered service provider must disclose a change to the initial information as soon as practicable, but not later than 60 days from the date on which the provider is informed of the change, unless disclosure is precluded due to extraordinary circumstances beyond the provider’s control, in which case, disclosure must be made as soon as practicable. Note that this continuing obligation applies to any change in the prior disclosure, including those that might not be deemed material.

Information provided upon request. The covered service provider is obligated to provide, upon request by the responsible plan fiduciary, any other information relating to the compensation received by the provider for services to comply with the reporting and disclosure requirements of Title I of ERISA. This reaches disclosures necessary for completion of the Form 5500 annual report, as well as any required disclosures concerning plan and investment fees and expenses to participants and beneficiaries. A provider must disclose the requested information not later than 30 days following receipt of a written request from the fiduciary or covered plan administrator, unless disclosure is precluded due to extraordinary circumstances beyond the provider’s control, in which case, the information must be disclosed as soon as practicable.

Disclosure errors. No contract or arrangement will fail to be reasonable under the final regulation solely because the service provider, acting in good faith and with reasonable diligence, makes an error or omission in disclosing the required information. However, the provider must disclose the correct information as soon as a practicable, but not later than 30 days from the date on which it knows of the error or omission.

Plan fiduciaries should review any existing written contracts they have with their service providers. These contracts should accurately describe the range of services (e.g., investment, recordkeeping, participant education) being provided in return for any charges against the plan. Moreover, plan fiduciaries with responsibility for reviewing investments need not, and should not, wait for the fee disclosures to be provided next year pursuant to the new regulations. Rather, plan fiduciaries should be proactive and request information now on the total fees being charged against plan assets and participants’ accounts. Then, the fiduciaries should review that information to determine both that they understand the information and that the fees being charged are reasonable in light of the services provided. Retirement plan fiduciaries should consider whether they need to hire independent investment advisors to assist with performing this fiduciary review.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.