The Department of Labor recently issued final regulations that require certain retirement plan service providers to disclose fee and related information to plan fiduciaries. Those fiduciaries in turn have to evaluate the reasonableness of such fees. The good news about these regulations is that they postpone the deadline for compliance from April 1, 2012 to July 1, 2012. The bad news is that the final regulations add new and more detailed compliance requirements.
Remember that these regulations apply only to retirement plans covered by ERISA. Consequently, welfare plans, SEPs, SIMPLE plans, IRAs, non-electing church plans and government plans are generally not covered. Also bear in mind that only certain service providers are subject to the new disclosure rules and that service providers who receive payments solely from the employer (and not the plan itself, either directly or indirectly) are not required to comply with the new fee disclosure rules (see here for more details).
Covered service providers will need to disclose detailed information about all their sources of fee income from the retirement plan, including "indirect" compensation received from third parties such as "revenue sharing" paid from mutual fund investments made by plan participants. The final regulations expand the required disclosure of indirect compensation to include a description of the arrangement between the service provider and the payer of the indirect compensation, such as a mutual fund provider.
The final regulations also include a sample guide and encourage service providers to use the sample guide for their initial disclosures, which must be made in advance of the date the provider's service agreement with a plan is entered into, extended or renewed, and within 60 days of any change in any of the required disclosures (within 30 days of discovery in the case of errors and omissions). In any event, service provider fee disclosures must be updated at least annually.
The final regulations also require plan fiduciaries to take action if a service provider fails to properly comply with the fee disclosure rules. If the service provider fails to meet the fiduciary's written request for compliance within 90 days, the fiduciary must consider whether or not to terminate the service provider's contract and, if the required disclosures relate to future services, the service provider contract must be terminated (failure by the plan to do so will cause the plan's contract with the non-compliant service provider to be a prohibited transaction).
Also, note that the companion participant level fee disclosure requirements also have been extended so that calendar year plan administrators are required to make their initial participant disclosures by August 30, 2012 and provide their first quarterly participant statements no later than November 14, 2012 (non-calendar year plans will have different effective dates).
Recommendations: Service providers subject to the fee disclosure rules will need to make their initial disclosures in accordance with the final regulations by July 1, 2012. Plan fiduciaries (and the HR staff, TPAs and professional advisors assisting with plan administration) will need to evaluate these disclosures and determine whether the disclosures appear complete and whether the fees charged to the plan or participant accounts are reasonable in amount. This has to happen by the same July 1, 2012 deadline. Failure to do so could cause existing service contracts to become prohibited transactions as of that date. Service providers need to consider whether to amend existing service contracts to incorporate the required disclosures or to prepare a separate fee disclosure document. Any concerns as to whether or not service providers are subject to the new fee disclosure rules should be resolved now, and plan administrators need to make sure that their service providers comply with the new rules. It would be prudent to do so in advance of the July 1, 2012 deadline so that responsible plan fiduciaries will have sufficient time to review the disclosures and determine whether or not the provider fees are reasonable in amount. Plan fiduciaries also should document their consideration of service provider fee disclosures to memorialize the proper discharge of their duties.
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