In previous Alerts from August 10, 2010 and July 26, 2011, we described the Department of Labor's (DOL) proposed and final interim regulations under ERISA Section 408(b)(2) that would require certain covered service providers to pension plans to disclose fee and services information to designated plan fiduciaries in order to avoid prohibited transaction penalties. The last extended deadline was established at April 1, 2012.
On February 2, 2012, the Employee Benefits Security Administration of the DOL released final regulations under ERISA Section 408(b)(2) with certain changes to the July 2010 interim final regulation and extended the initial deadline for disclosure to plan fiduciaries from April 1, 2012, to July 1, 2012.
Covered Service Providers
Under the final regulations, direct or indirect fees paid by a 401(k) plan or other qualified retirement plan to "covered service providers" will be prohibited transactions (subjecting fiduciaries and covered service providers to excise tax penalties), unless covered service providers expected to receive over $1000 in direct or indirect fee compensation from the plan comply with the required disclosures. Covered service providers required to make these disclosures are banks and commercial trust companies, auditors, registered investment advisors, actuaries, appraisers, consultants, record keepers/TPAs, investment and insurance brokers/advisors, and others providing direct services to the plan regarding investments and who expect to receive direct or indirect compensation from the plan. Service providers receiving fee compensation solely from the plan sponsor's general assets are not covered by the fiduciary disclosure rule. However, the final rules treat employer reimbursement from the plan as direct compensation to the covered service provider. Some of the above service providers who only receive direct compensation from the plan are exempt from disclosures. Certain frozen 403(b) annuity and custodial contracts issued to employees before January 1, 2009, are also exempted from the service provider disclosure requirements.
New Compliance Deadline
All fiduciaries of qualified retirement plans should expect to receive compliant disclosures before the July 1, 2012, deadline. The DOL has not specified any particular form for the initial service provider disclosures other than to state that they must be in writing. More than one document is permitted. Following the implementation of the fiduciary disclosure rule, plan fiduciaries are expected to comply with the participant level fee disclosure requirements in Labor Regulations Section 2550.404(a)-5. Covered service providers are expected to provide flow-through information about designated investment alternatives (mutual funds, collective funds or insurance annuities) that can be passed along to plan participants describing the annual operating expenses of the fund, any commissions or charges assessed at the time of investment or withdrawal from particular investment alternatives and any ongoing expenses in addition to annual operating expenses that are assessed to plan accounts.
Description of Indirect Compensation Arrangements
Any covered service provider who expects to receive over $1000 in "indirect compensation," which means compensation from third parties, must disclose that fact and describe the arrangements in initial and annual disclosures. An estimate of any indirect compensation to be received or methodology assumptions (e.g., basis points on fund assets) are permitted. An example of indirect compensation is a revenue-sharing payment by a mutual fund company to a TPA for sub-recordkeeping and other participant services.
Good Faith Exemption
If a covered service provider fails to provide the required disclosures within 90 days after a request by the fiduciary, the fiduciary is required to determine whether to terminate or continue the contractual arrangement. If the information is not disclosed promptly after the 90-day period, the final rule requires that the service arrangement be terminated "as expeditiously as possible" in order to avoid prohibited transaction penalties being assessed against the plan fiduciary.
Participant Disclosures to Follow
With respect to the participant disclosures, we have learned that many of the major investment companies are assisting plan sponsors in meeting their obligations under ERISA Section 404(a). If you have not received information from your investment company provider, you or your broker/advisor should contact the investment company as soon as possible to find out what services it will be providing. If the investment company is not planning to provide the participant statements, the third-party administrator or the plan sponsor will need to create and issue the required participant disclosure statements. The first participant disclosure statements will be due August 30, 2012.