The Department of Labor (the “DOL”) has now issued a final, interim regulation on improved fee disclosure for pension plans. The DOL has also made available a Fact Sheet which describes the new regulation. Here is what the Fact Sheet says:
ERISA requires plan fiduciaries, when selecting and monitoring service providers and plan investments, to act prudently and solely in the interest of the plan’s participants and beneficiaries. Responsible plan fiduciaries must also ensure that arrangements with their service providers are “reasonable” and that only “reasonable” compensation is paid for services. Fundamental to the ability of fiduciaries to discharge these obligations is obtaining information sufficient to enable them to make informed decisions about the services, the costs, and the service providers.
The new regulation represents a significant step toward ensuring that pension plan fiduciaries are provided the information they need to assess both the reasonableness of the compensation to be paid for plan services and potential conflicts of interest that may affect the performance of those services. For the first time, a specific obligation to provide this information is imposed on plan service providers.
Overview of The New Regulation
• It applies only to defined contribution and defined benefit pension plans, and focuses on the disclosure of the direct and indirect compensation certain service providers receive from the plans.
• It applies to plan service providers that expect to receive at least $1,000 in compensation in connection with their services to the plan, and that provide: (1) certain fiduciary or registered investment advisory services, (2) recordkeeping or brokerage services to a participant-directed individual account plan in connection with the investment options made available under the plan or (3) certain other services for which indirect compensation is received.
• It focuses on service providers and compensation arrangements that are most likely to raise questions for plan fiduciaries with respect to the amount of compensation being received by a service provider for plan-related services and potential conflicts of interests that might compromise the quality of those services.
• It includes a class exemption from ERISA’s prohibited transaction provisions for a plan fiduciary who enters into a contract without knowing that the service provider has failed to comply with its disclosure obligations.
Disclosure of Services and Compensation Under the New Regulation
• Information required to be disclosed by plan service providers must be furnished in writing to the plan fiduciary.
• Information that must be disclosed includes a description of the services to be provided and all direct and indirect compensation to be received by the service provider, its affiliates or subcontractors from the plan. Direct compensation is compensation received directly from the plan. Indirect compensation generally is compensation received from any source other than the plan sponsor, the covered service provider, an affiliate, or subcontractor.
• Because certain services and costs are so significant or present the potential for conflicts of interest, information concerning those services and costs must be disclosed without regard to whether services are furnished as part of a bundle or package.
• Service providers must disclose whether they are providing any services as a fiduciary to the plan.
• Information also must be disclosed about plan investments and investment options. These disclosure obligations are placed on the fiduciaries to investment vehicles that hold plan assets and on recordkeepers and brokers who, through a platform or other mechanism, facilitate the investment in various options by participants in individual account plans, such as 401(k) plans.
Ongoing Disclosure Obligations Under the New Regulation
• Changes: A service provider generally must disclose a change to the initial information required to be disclosed as soon as practicable, but no later than 60 days from the date on which the covered service provider is informed of such change.
• Reporting and Disclosure Requirements: Service providers also must, upon request, disclose compensation or other information related to their service arrangements that is requested by the responsible plan fiduciary or plan administrator in order to comply with ERISA’s reporting and disclosure requirements.
The new regulation is effective for contracts or arrangements between plans and service providers as of July 16, 2011.