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Looming Deadline for Compliance with New Labor Department Retirement Plan Service Provider Disclosure Regulations

May 10, 2012


The Department of Labor has issued a new regulation that will impose upon employers a new duty to secure from designated retirement plan service providers written information regarding a wide range of plan services.  The employer must secure the information in writing by July 1, 2012.

The regulation relates to a key provision of ERISA that allows expenses to be paid from retirement plan assets only if the amounts are reasonable.  Toward this end, the regulation is designed to ensure that an employer is advised in advance of all fees and compensation for services to be rendered, including amounts indirectly paid that may not otherwise be readily disclosed.  With this information in hand, an employer can better evaluate whether the fees are reasonable in light of the services provided.

Failure to take appropriate measures to secure this information will result in the employer's engagement of the applicable service provider to be a prohibited transaction under ERISA.  At the very least, this will require the employer to report the prohibited transaction on its Form 5500 annual report.

An outline of the new regulation is below.

Q&A-1. Which plans are affected by the new regulation?

The regulation pertains only to qualified retirement plans.  It does not apply to non-qualified deferred compensation plans, nor to health and welfare plans.

Q&A-2. From which service providers must the information be secured?

The service providers from whom this information must be secured are listed below.

  • Any institution or person providing services directly to the plan as an ERISA fiduciary.  This includes a corporate trustee of a 401(k) plan.
  • A registered investment advisor to a plan.
  • A recordkeeper for a plan that permits participant-directed investments if the recordkeeper's services include a platform of designated investment alternatives.

Other service providers are covered by the regulation only if the service provider receives payment other than from the employer or the plan (such as commissions, soft dollars, finder's fees or Rule 12b-1 fees from a mutual fund).  Consequently, the new mandate generally would not apply to lawyers and accountants, because they do not receive any compensation other than directly from the employer or the plan.

Q&A-3. What information must be disclosed?

The key information required to be disclosed is described below.  Additional information will be required from a covered recordkeeper.

  1. Description of Services.  The service provider must provide a clear description of the services to be provided to the plan.  The level of detail will depend upon the scope of the services provided.  However, a general statement (e.g., "trustee services") will not suffice.

  2. Status as a Fiduciary or Registered Investment Advisor.  A service provider that is acting as a fiduciary (which includes a corporate trustee) must provide a statement acknowledging such status.  Similarly, if a service provider is providing services as a registered investment advisor, it must provide a statement to that effect.

  3. Direct Compensation Information.  A service provider must disclose, in writing, all compensation that it will receive, or reasonably expects to receive, directly from the plan.  The compensation may be listed in the aggregate, or broken out on a service-by-service basis (except with respect to recordkeeping services, which are to be segregated as discussed below).

    A service provider must also disclose all indirect compensation that it reasonably expects to receive for services provided to or for the plan.  For this purpose, "indirect compensation" means compensation from any source other than from the plan or the employer.  The disclosure must identify the services for which the indirect compensation is received, and the payer of the indirect compensation (such as a mutual fund).
  4. Manner of  Compensation Payment.  The manner in which compensation will be received must be disclosed.  For example, will the plan be billed, or will payments be deducted directly from the plan's accounts or investments?

  5. Compensation upon Termination of Contract.  The disclosure must include a description of any compensation that the service provider:
    • Reasonably expects to receive in connection with the termination of the contract; and
    • How any prepaid amounts will be calculated and refunded upon termination.

  6. Payments to Related Parties.  Compensation paid to an affiliate or other related party of a service provider must be disclosed if the compensation is set on a transaction basis (e.g., commissions, soft dollars or incentive compensation based on business placed or retained), or is charged directly against the plan's investment yield and reflected in the net value of the investment (e.g., 12b-1 fees).

    The disclosure must also identify:
    • The services for which the related-party compensation will be received;
    • The payer and the recipient of the related-party compensation; and
    • The status of the payer and the recipient as an affiliate or subcontractor.

Q&A-4. What special reporting rules apply to recordkeeping services?

A recordkeeper that also provides investment options must disclose the information below.

  1. Compensation. If the contract with the recordkeeper does not explicitly describe the compensation for the recordkeeping services, or the compensation for recordkeeping services is offset or rebated based on other compensation, then a reasonable good faith estimate of the cost to the plan of the recordkeeping services, with an explanation of the methodology and assumptions used, must be provided.  The good faith estimate must take into account the rates that the recordkeeper would charge to third parties, or the prevailing market rates for similar recordkeeping services for a similar plan with a similar number of participants.

  2. Investment Fees.  In regard to each available investment alternative, the recordkeeper will need to disclose (directly or through materials furnished by a fund provider):

    • Compensation charged directly against the amount invested in connection with an acquisition or sale (e.g., sales loads, surrender charges);
    • Annual operating expenses (if the return is not fixed); and
    • Other ongoing expenses (e.g., wrap fees).

Q&A-5. When must the disclosures be made?

The initial disclosures must be made no later than July 1, 2012.  Thereafter, the information must be provided "reasonably in advance" of the date a new contract is entered into, or a current contract is extended or renewed.

Any change to the required information must be disclosed as soon as practicable, but generally no later than 60 days after the date on which the service provider first learned of the change.  Notice is required even if the change is not material.

The information must be disclosed in writing, but it need not be made part of the contract itself.

Q&A-6. What must an employer do if a service provider does not provide the information?

An employer's failure to secure the information will presumptively give rise to a prohibited transaction under ERISA.  However, it can avoid this violation if, upon discovering that the service provider has failed to disclose all the required information, the employer sends a written request for the information to the service provider.  If the service provider fails to comply with the written request within 90 days, then the employer must notify the Department of Labor of such noncompliance.

For further information or questions regarding the new Department of Labor plan service provider disclosure regulation, please contact the Schwabe attorney with whom you work or Wally Miller at 541-686-3299 or