On February 2, 2012, the Department of Labor issued a final rule concerning the fee information that must be disclosed to plan fiduciaries in order for a service provider contract or arrangement to be considered "reasonable," as required by Section 408(b)(2) of the Employee Retirement Income Security Act of 1974, as amended (ERISA).
The deadline for compliance with the final rule has been extended to July 1, 2012 (as mentioned in our Employee Benefits Alert of February 3, 2012, "Approaching Deadlines for Retirement Plan Fee Disclosure Rules: What Clients Should Do Now").
The final rule retains most of the disclosure requirements of the interim final rule (discussed in our Employee Benefits Alert of July 20, 2010, "Plan Fee Disclosures: DOL Issues Interim Final Rule"), but makes several significant modifications and clarifications, as described below:
Covered Plans. The type of plans covered by the final rule are expansive in scope. However, certain annuity contracts and custodial accounts described in Section 403(b) of the Internal Revenue Code are excluded from the types of plans covered by the final rule. Under the final rule, a "covered plan" does not include all, or that part, of a 403(b) plan that consists exclusively of "frozen" contracts or custodial accounts. For example, not covered are contracts for which the plan sponsor ceased to have any obligation to make contributions (including employee salary reduction contributions), and in fact did cease making contributions, for periods before January 1, 2009.
Covered Service Providers. Like the interim final rule, the final rule provides several categories of covered service providers, including the following: (i) ERISA fiduciaries or registered investment advisers; (ii) providers of recordkeeping services or brokerage services to a covered plan that permits participants and beneficiaries to direct the investment of their accounts; and (iii) those providing specified services to the covered plan when the covered service provider reasonably expects to receive indirect compensation or certain payments from related parties. The final rule clarifies that the party entering into the contract or arrangement with the covered plan is the covered service provider responsible for making the required disclosures, even if other parties perform some of the services.
Initial Disclosure of Indirect Compensation. Under the final rule, a covered service provider must not only identify the payer of "indirect compensation" (as defined under the final rule), but also describe the arrangement between the payer and the covered service provider, affiliate, or subcontractor (as applicable), under which the indirect compensation is paid.
Investment-Related Disclosures. The final rule expands the disclosure requirements for descriptions of operating expenses of a "designated investment alternative" (DIA) (that is, an investment option offered by a plan). Specifically, the covered service provider must disclose the total annual operating expenses for the DIA calculated according to Labor Reg. 2550.404a-5(h)(5), rather than rely on the interim final rule's more general standards. In addition, the final rule requires disclosure of any other information relating to DIAs that is within the control of, or reasonably available to, the covered service provider, if the information is considered investment-related information which must be provided under the final rule governing participant level disclosures (discussed in our Employee Benefits Alert of October 22, 2010, "Fee and Investment Disclosure in Participant-Directed Plans: Final Rule"). These changes are designed to reconcile the final rule regarding service provider disclosures to fiduciaries with the final rule governing participant-level disclosures.
Like the interim final rule, the final rule also requires certain investment disclosures from covered providers of recordkeeping or brokerage services to an individual account plan that permits participants and beneficiaries to direct the investment of their accounts, if one or more DIAs will be made available in connection with those services.
Under the final rule, covered service providers may comply with these disclosure requirements for DIAs by providing current disclosure materials of the DIA issuer, or information replicated from these materials, that include the required information, provided that: (i) the issuer cannot be an affiliate of the covered service provider; (ii) the issuer is (a) a registered investment company, (b) an insurance company qualified to do business in any state, (c) an issuer of a publicly traded security, or (d) a financial institution supervised by a state or federal agency; and (3) the covered service provider acts in good faith and does not know that the materials are incomplete or inaccurate, and furnishes the plan fiduciary with a statement to this effect.
Format for Initial Disclosures. The final rule provides a sample guide to initial disclosures in an appendix. This may be used on a voluntary basis by covered service providers to assist responsible plan fiduciaries with the required disclosures.
Timing of Disclosures. The final rule changes the deadline for disclosures of all investment-related information to "at least annually." The requirement that a covered service provider must disclose any change to required information as soon as practicable, but generally not later than 60 days from the date on which the covered service provider is informed of the change, now applies only for specified information. The final rule also provides an alternate timing standard for changes in investment-related information.
Timing of Other Requested Information. The final rule coordinates the timing of providing reporting and disclosure information requested by a responsible plan fiduciary with the date applicable for such reporting and disclosure. Under the final rule, requested information generally must be furnished reasonably in advance of the date on which the responsible plan fiduciary or covered plan administrator states that it must comply with applicable reporting and disclosure requirements.
Disclosure Errors. The final rule clarifies that errors or omissions in disclosures of changes to previously disclosed information can be corrected within 30 days after the covered service provider knows of the error or omission.
"Compensation." The final rule modifies the definition of "compensation" and, in particular, changes how a description of compensation may be expressed. A description of compensation or cost may be expressed as a monetary amount, formula, percentage of the covered plan's assets, or a per capita charge for each participant or beneficiary. The description may include a "reasonable and good faith" estimate of compensation or cost if the covered service provider cannot otherwise readily describe the compensation or cost. In this case, the covered service provider must explain the methodology and assumptions used for the estimate.
Exemption of the Responsible Plan Fiduciary. The final rule requires new conditions for a plan fiduciary to obtain relief under the prohibited transaction class exemption. Upon discovering that a covered service provider has failed to disclose certain information, a responsible plan fiduciary must in writing request the information from the covered service provider. If the covered service provider fails to comply with the written request within 90 days, the responsible plan fiduciary must determine whether to terminate or continue the contract or arrangement, consistent with the ERISA Section 404. If the requested information related to future services is not disclosed promptly after the end of the 90-day period, the final rule requires that the responsible plan fiduciary terminate the contract or arrangement.
