Important Reminder: Final DOL Regulations on Fee Disclosures and Other Plan Information

The U.S. Department of Labor (DOL) finalized new fee disclosure regulations earlier this year. The regulations fall under two major sections: regulations under the Employee Retirement Income Security Act of 1974 (ERISA) Section 408(b)(2), which applies to fee disclosures from service providers to plan sponsors (effective July 1, 2012), and regulations under ERISA Section 404(a), which apply to certain disclosures from plan sponsors to plan participants (effective Aug. 30, 2012).

ERISA requires plan fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries when selecting and monitoring service providers and plan investments. Responsible plan fiduciaries also must make sure that arrangements with their service providers are reasonable and that only reasonable compensation is paid for services. The spirit of the service provider fee disclosure regulation is to require covered service providers (CSPs) to provide sufficient information to plan fiduciaries to allow them to make informed decisions about an employee benefit plan’s services, the costs of such services, and the service providers as well as to comply with the reporting and disclosure requirements under Title 1 of ERISA.

DOL Regulations Under 408(b)(2)
Regulations under ERISA Section 408(b)(2) require CSPs to meet certain requirements in providing fee disclosures to plan sponsors. The regulations pertain only to compensation paid to a CSP from plan assets or from third parties and does not apply to fees that are paid directly by the plan sponsor to a CSP.

Application of the Disclosure Rules
The new service provider disclosure rules apply to any CSP that reasonably expects to receive $1,000 or more of direct or indirect compensation in connection with its services to a plan. Covered plans include defined benefit and defined contribution plans, including ERISA 403(b) plans. Welfare benefit plans are not affected by the new disclosure rules. The DOL has indicated that it intends to propose separate fee disclosure regulations for welfare benefit plans in the future.

A CSP can include an individual or company that provides:

  • Services as a fiduciary or registered investment adviser
  • Recordkeeping or brokerage services
  • Other services where indirect compensation (defined below) is received, such as:
    • Accounting
    • Auditing
    • Actuarial
    • Appraisal
    • Banking
    • Consulting related to investment policies
    • Consulting related to selection of service providers or plan investments, custodial, insurance, investment adviser, legal, recordkeeping, securities or other investment brokerage, third-party administration, or valuation services provided to a plan

Content and Timing of Disclosures
The fee disclosures apply to existing and new contracts or arrangements, and must provide detailed information about the CSP’s services, direct and indirect compensation, and ERISA fiduciary status, and must be written in a manner that facilitates the plan fiduciary’s evaluation of the information. The disclosures must be made reasonably in advance of the date a service contract is entered into, but no later than July 1, 2012, in the case of existing arrangements.

Types of Compensation Disclosed
The final regulations include disclosure requirements for direct and indirect compensation. Direct compensation refers to payments made to service providers directly from a plan. For example, if a registered investment adviser provides a fixed fee to be paid directly from plan assets, such payments would be considered direct compensation. Indirect compensation generally is any compensation (including nonmonetary compensation such as gifts, awards, and trips) received by a CSP from any source other than the plan, the plan sponsor, or an affiliate.

Compensation must be specified in the disclosure (including a dollar amount, a formula based on plan assets, or a per-participant charge) so that the plan fiduciary can evaluate the total amount of compensation – both direct and indirect – that the CSP will receive. In the case of indirect compensation, the disclosure also must describe the services for which the indirect compensation will be received, the payer of the indirect compensation, and the arrangement with the payer.

Enforcement of the Rules
The disclosure requirements under Section 408(b)(2) are enforced under the DOL prohibited transaction (PT) rules. Because service providers are “parties in interest” under ERISA, an exemption from the PT rules is necessary for a plan to engage a service provider without committing a PT. An exemption is provided to the PT rules under 408(b)(2) for plans that engage a CSP that is a party in interest as long as the contract or arrangement is “reasonable.” An arrangement is considered reasonable if it is in writing and the new fee disclosure rules are met. Failure by a CSP to provide to a responsible plan fiduciary a written description of the service arrangement and comply with the fee disclosure requirements will result in a PT under ERISA Section 406, and also is subject to penalties under Internal Revenue Code (IRC) Section 4975.

Form 5500 and Plan Audit Implications
As noted, a failure by a CSP to provide a written description of the service arrangement and comply with the fee disclosure requirements will result in a PT under ERISA and subject the plan to penalties under the IRC. If a PT occurs, the plan sponsor must disclose the PT on Part III of Schedule G of the Form 5500, “Financial Transaction Schedules,” for the plan year in which the PT occurs. This schedule also should be included as a supplemental schedule to the audited financial statements of the plan and be covered by the report of independent auditors. Thus, if a plan does not receive all required information from a CSP by July 1, 2012, to comply with the new regulations, the CSP’s arrangement will need to be reported as a PT within Form 5500 filed for the 2012 plan year and on a supplemental schedule to the audited financial statements included with Form 5500.

DOL Regulations Under 404(a)
Under Section 404(a), plan sponsors are required to disclose certain plan and investment-related information, including certain fee and expense information to all participants under participant-directed defined contribution plans. Plan sponsors initially must comply with the disclosure requirements no later than Aug. 30, 2012, and quarterly thereafter.

Going Forward
Plan sponsors need to understand the information to be received from CSPs as well as the actions that must be taken by fiduciaries to provide plan and investment-related information to plan participants. The final regulations are complex. Your legal counsel and service providers can provide assistance in meeting the new requirements.

DISCLOSURE REQUIRED BY U.S. TREASURY DEPARTMENT CIRCULAR 230: Crowe Horwath LLP must inform you that any advice in this communication to you was not intended or written to be used, and cannot be used, to avoid any government penalties that may be imposed on a taxpayer.

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Vicky Ludema
Managing Director