In Retirement News for Employers (Winter 2012), the Internal Revenue Service (the “IRS”) talks about the new rules of the U.S. Department of Labor (the “DOL”) for fee disclosures to plan fiduciaries. Here is what the IRS said.
On February 3, the DOL published a final rule that will provide employers who sponsor pension and 401(k) plans with information about the administrative and investment costs associated with providing such plans. This rule requires service providers to furnish information to enable fiduciaries to determine both the reasonableness of compensation paid to the service providers and any conflicts of interest that may impact a service provider’s performance under a service contract or arrangement. It requires disclosures of direct and indirect compensation certain service providers receive in connection with the services they provide.
The rule applies to those service providers that expect to receive $1,000 or more in compensation and:
• provide certain fiduciary or registered investment advisory services,
• make available plan investment options in connection with brokerage or recordkeeping services, or
• otherwise receive indirect compensation for providing certain services to the plan.
The DOL also announced that in the near future it intends to publish for public comment a separate proposal that would require service providers, in addition to providing the required fee and investment expense information, to furnish a guide or similar tool to assist plan fiduciaries in identifying and locating the potentially complex information that must be disclosed and which may be located in multiple documents.
The DOL also announced a 3-month extension in the effective date of this rule, meaning that service providers must be in compliance by July 1, 2012, for new and existing contracts or arrangements between ERISA-covered plans and service providers. The 3-month extension of the effective date was provided to allow service providers sufficient time to prepare for compliance. Service providers not in compliance as of July 1 will be in violation of ERISA’s prohibited transaction rules and subject to penalties under the Internal Revenue Code. The final rule includes a class exemption from the prohibited transaction provisions of ERISA for plan fiduciaries that enter into service contracts without knowing that the covered service provider has failed to comply with its disclosure obligations. The class exemption requires that fiduciaries notify the Department of the disclosure failure.
The effective date of this final rule works in conjunction with the compliance date of DOL’s participant-level disclosure regulation, which requires plan administrators to give workers who direct their retirement accounts in 401(k)-type plans easy-to-understand information in order to compare the plan investment options available to them. Plan administrators for calendar year plans now must make the initial annual disclosure of plan and investment information (including associated fees and expenses) to participants no later than August 30, 2012, and the first quarterly statement (for fees incurred July through September) must be furnished no later than November 14, 2012.