Regulatory Update – DOL Issues Fee Disclosure Rules

Capital BuildingIn July, the Department of Labor released its long-awaited, interim final regulations on plan fee disclosure. These rules amend the existing law under 408(b)(2) of ERISA that permits plan assets to be used to pay service provider fees, as long the services are necessary and the compensation for the service is reasonable. Originally released in 2008 by the Bush Administration and subsequently struck down on the first day of Obama’s presidency, the current rules differ slightly from the original. These rules become effective on July 16, 2011.

The regulation’s objective is to assist plan fiduciaries in understanding the complex compensation arrangements paid to their providers and have conflicts of interest disclosed to them that may affect the performance of services they receive. In brief, these rules require plan service providers to disclose fees, compensation and conflicts of interest to the responsible fiduciary of a covered retirement plan in order for the service provider’s compensation to be considered reasonable (and lawful). Under the new regulations, full disclosure is finally required.

The regulation’s defined the following:

  • Covered Plans are defined contribution and defined benefit retirement plans covered by ERISA [for example, 401(k), 403(b) and defined benefit plans].
  • Covered Service Providers are entities who expect to receive $1,000 or more in compensation from plan services [including recordkeepers, auditors, or RIAs].

Additionally, the new rules highlight the following:

Required Disclosure: There is no specific format of disclosure in the regulations,   but it must be done in writing. Required content includes the descriptions of the   services provided, the total compensation to be received and how it is to be   received.

Timing of Disclosures: Disclosures for existing engagements must be made before   July 16, 2011. New engagements must be provided reasonably in advance of the   services start date. Changes to existing engagements can be made no later than 60 days after provider informed of change.

Requirements for Plan Fiduciaries: Fiduciaries must ensure that disclosures are provided, review them and request any missing information. If full information not provided, the fiduciary must notify the DOL.

The 408(b)(2) regulations are part of a broader three-part initiative by the DOL to address increased disclosure and plan transparency covering the fee’s service providers must report to plan sponsors and participants. These initiatives were:

  • Part I: The revision of reporting requirements in Schedule C of the Form 5500 that was first effective for the 2009 plan year.
  • Part II: This amendment to ERISA Section 408(b)(2) covering fees and other disclosures required from service providers to plan fiduciaries.
  •  Part III: Addresses disclosures to plan participants under defined contribution plans (final regulations were recently released on October 14).

North Pier has stated numerous times before that we believe we are on the proper path towards full disclosure. The long awaited 408(b)(2) Regulations are intended to provide greater transparency to plan sponsors to assist them in the effective evaluation of their plan’s service arrangements. Plan fiduciaries should begin to identify the information that will be presented to them to comply with these new rules. A challenge that may arise is the lack of a required uniform disclosure document. This may require fiduciaries to find an acceptable template in order to ensure compliance.

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