On February 2, 2012, the Department of Labor (DOL) published final rules regarding service provider fee disclosures (Final Rules). The Final Rules set forth specific fee disclosure obligations for plan service providers, designed to ensure that plan fiduciaries can accurately analyze the fees charged when selecting and monitoring service providers for their qualified retirement plans.
Background on Service Provider Fee Disclosure Rules
Generally, the Employee Retirement Income Security Act (ERISA) requires plan fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries when selecting and monitoring service providers and plan investments. In addition, ERISA prohibits plan fiduciaries and plans from entering into a contract with a service provider unless that contract is for “reasonable” compensation. The service provider fee disclosure rules set forth fee-related information that service providers must disclose to plan administrators in order for the service provider contract to be considered “reasonable” within the meaning of ERISA. The Final Rules can be found here (for a general discussion of the Final Rules, please see the DOL Fact Sheet). Note that, while the service provider fee disclosure rules generally describe information that must be disclosed by service providers, the ultimate responsibility for ensuring that the service provider fee disclosures have been made lies with the plan’s fiduciary (generally, the employer).
Summary of the Final Rules
The Final Rules finalize interim final fee disclosure rules that were previously issued on July 16, 2010 (Interim Rules). The Final Rules retain the same basic structure of the Interim Rules, but make some major modifications. Below is a summary of some of the more substantial modifications made by the Final Rules:
- 403(b) Plans. The Final Rules clarify that certain 403(b) plans (generally, those that were frozen as of January 1, 2009) are exempt from the fee disclosure rules.
- Initial Disclosure of Indirect Compensation. The Final Rules add an additional initial disclosure requirement. The covered service provider must describe the arrangement between the covered service provider and any entity that will pay the covered service provider indirect compensation. This requirement is designed to illustrate for the responsible plan fiduciary any potential conflicts of interest related to the indirect compensation.
- Investment Disclosures (Fiduciary Services). In addition to the service provider fee disclosure obligations set forth in the Final Rules, the DOL has issued participant-level disclosure regulations that require plan fiduciaries of certain qualified plans to make fee-related disclosures to participants. Modifications were made to the Interim Rules to coordinate the service provider fee disclosure obligations with the participant-level disclosure regulations.
- Assistance for Plan Fiduciaries. The DOL clarified that covered service providers have an obligation to help plan fiduciaries review the applicable service provider-furnished documents to ensure that those documents comply with the Final Rules. To that end, the DOL has reserved a section in the Final Rules and intends to issue a “guide” that covered service providers will provide to plan fiduciaries so that the plan fiduciaries will better be able to navigate the compensation information set forth in the service provider-supplied documents. Further, the Final Rules contain a “Sample Guide to Initial Disclosures” designed for service providers to provide to plan fiduciaries for assistance with the fiduciaries’ review of the service providers’ documents with respect to the required disclosures.
- Timing of Disclosures; Disclosure Errors. The Final Rules clarify certain deadlines for providing disclosures – initial disclosures of all investment-related information must be provided “at least annually” and reporting and disclosure information must be provided reasonably in advance of the date in which the plan fiduciary or plan administrator states that it must comply with the plan’s reporting and disclosure requirements. The Final Rules also clarify that errors and omissions in previously disclosed information must be corrected as soon as practicable, but no later than 30 days from the date on which the service provider knew of the error or omission.
- Definition of Compensation. The definition of “compensation” has been modified in the Final Rules to allow the description of compensation or cost to be expressed as a monetary amount, formula, percentage of the covered plan’s assets, a per capita charge, or other reasonable method. Under certain circumstances, the covered service provider may use a reasonable and good faith estimate to determine compensation or cost.
- Relief From and Clarification of Fiduciary Liability. As stated above, the plan fiduciary is generally responsible for ensuring that the service provider fee disclosure rules are complied with. However, there is some relief from the liability associated with non-compliance with the service provider fee disclosure rules where the fiduciary has acted in a prudent manner in reviewing the service contract. The prohibited transaction class exemption under the Final Rules clarifies the circumstances under which the fiduciary will be deemed to have acted in a prudent manner and emphasize that any determinations made by a plan fiduciary are governed by the fiduciary obligations set forth in ERISA.
The Final Rules are effective July 1, 2012. In addition, initial disclosures under the participant-level disclosure regulations must be provided to plan participants no later than 60 days after the effective date of the Final Rules, or August 30, 2012.
As discussed above, while the service provider must make the disclosures under the service provider fee disclosure rules, the liability for non-compliance with the rules falls on the plan fiduciary (which is usually the employer). Therefore, plan sponsors must be aware of the Final Rules and must review all service contracts (new and existing) prior to the compliance deadline.