Retirement Plan Service Provider Fee Disclosure – DOL Regulation Requires Disclosure to Retirement Plan Fiduciaries of Direct and Indirect Compensation Received by Certain Service Providers
Retirement plan fiduciaries should be aware of the upcoming deadline for compliance with the Department of Labor ("DOL") interim final regulations under ERISA Section 408(b)(2) ("Interim Regulations"), requiring the disclosure, to fiduciaries of defined contribution and defined benefit plans, of direct and indirect compensation received by certain service providers. The Interim Regulations require covered service providers of ERISA-covered plans (plans sponsored by governmental employers and all welfare plans are exempt) to provide extensive information regarding service provider fees. Covered service providers not in compliance as of April 1, 2012 may be subject to the prohibited transaction tax penalties under Section 4975 of the Internal Revenue Code.
Plan fiduciaries must be aware of the fees paid to service providers for their retirement plans, and must be sure that all fees are reasonable. These new disclosure requirements are designed to ensure that plan fiduciaries are provided with the information they need to assess both the reasonableness of the compensation paid for plan services and any potential conflicts of interest that may affect the performance of those services.
These Interim Regulations establish, for the first time, a specific disclosure obligation for service providers, such as third party administrators and trustees. Covered service providers need to take steps now in order to be able to provide the required information, and plan fiduciaries must be prepared to receive and evaluate the information contained in these new disclosures.
The Interim Regulations focus on the disclosure of the direct and indirect compensation received by "Covered Service Providers" of ERISA-covered plans. "Covered Service Providers" are service providers that reasonably expect to receive $1,000 or more in compensation, direct or indirect, for providing "covered services." Note that this applies even if the services or compensation will be received by an affiliate or subcontractor of the Covered Service Provider. For indirect compensation, the service provider must disclose the services to which the compensation applies and the payer of the indirect compensation. Covered services include the following:
The service provider will not be penalized if it makes an error or omission in disclosure, so long as it (1) acted in good faith and with reasonable diligence, and (2) corrects the error within 30 days after discovering the error. The regulation also includes a class exemption from the prohibited transaction provisions of ERISA for a plan fiduciary who enters into a contract without knowing that the service provider has failed to comply with its disclosure obligations.
Disclosure Requirements: Services and Compensation
Information required to be disclosed by service providers must be furnished in writing to the plan fiduciary. The rule does not require a formal written contract delineating the disclosure obligations. However, the disclosures still must be made in writing (presumably through a written notice). Information that must be disclosed includes:
Direct compensation is compensation received directly from the plan (e.g., checks issued from the plan, amounts deducted from plan assets, amounts paid from forfeitures, etc). Indirect compensation generally is compensation received from any source other than the plan sponsor, the covered service provider, an affiliate of a covered service provider, or a subcontractor of a covered service provider.
Information also must be disclosed about plan investments and investment options. These disclosure obligations are placed on the fiduciaries to investment vehicles that hold plan assets and on recordkeepers and brokers who, through a platform or other mechanism, facilitate the investment in various options by participants in individual account plans, such as 401(k) plans.
If these disclosure requirements are not met by the covered service provider, the arrangement with the fiduciary will not be "reasonable" and will constitute a prohibited transaction. The fees involved will be subject to prohibited transaction penalties of 15 percent of the fees involved, and the penalties will compound annually until the disclosure is corrected or the contract is terminated. The covered service provider is responsible for paying this penalty.
Timing of Disclosure of Change in Information
A service provider generally must disclose a change to the initial information required to be disclosed as soon as practicable, but no later than 60 days from the date on which the covered service provider is informed of such change.
Service providers also must, upon request, disclose compensation or other information related to their service arrangements that is requested by the responsible plan fiduciary or plan administrator in order to comply with ERISA's reporting and disclosure requirements.
Duties of Fiduciary Upon Failure of Covered Service Provider to Comply
If a covered service provider fails or refuses to comply with its disclosure obligations, a fiduciary is required to make a written request to the service provider. We drafted the following language for potential use by a fiduciary as part of this request to a covered service provider (note that this is not model language provided by DOL):
If after such a written request, the service provider still fails to provide the required information, then the regulation requires that 30 days following the earlier of:
1. the date of the covered service provider's refusal to furnish the requested information, or
2. the date which is 90 days after the date of the fiduciary's written request to the service provider,
the responsible plan fiduciary must file a "Delinquent Service Provider Disclosure" with EBSA's Office of Enforcement reporting the service provider's failure or refusal to provide the requested information. DOL has provided a sample notice for this disclosure, which can be found at http://www.dol.gov/ebsa/DelinquentServiceProviderDisclosureNotice.doc.
In addition, the responsible plan fiduciary must determine whether to terminate or continue the contract or arrangement with the service provider who failed or refused to provide the information. In making this determination, the responsible plan fiduciary will need to evaluate the nature of the failure, the availability, qualifications, and cost of replacement service providers, and the covered service provider's response to notification of the failure.
Suggested Preparation Activities for Plan Fiduciaries
1. Determine which plans will receive these disclosures
2. Determine which covered service providers will be required to provide these disclosures
3. Create a process for evaluating disclosures from covered service providers (e.g., Are the fees reasonable? Is there enough information to provide required disclosures to participants?)
4. Create a system for storing and documenting all of the aboveThe Employee Benefits Group at Sherman & Howard L.L.C. is prepared to assist plan fiduciaries and service providers with their obligations under these new disclosure rules.
If you have any questions about this Client Advisory, please contact any member of our Employee Benefits Team.
Sherman & Howard has prepared this advisory to provide general information on recent legal developments that may be of interest. This advisory does not provide legal advice for any specific situation. This does not create an attorney-client relationship between any reader and the firm. If you want legal advice on a specific situation, you must speak with one of our lawyers and reach an express agreement for legal representation.
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©2011 Sherman & Howard November 21, 2011