If you are a member of a retirement plan committee or other responsible plan fiduciary and thought this summer would be a good time for a vacation, the U.S. Department of Labor (“DOL”) has another idea for you. Instead of getting away from your responsibilities, two new regulations will increase the work you must do to satisfy your fiduciary obligations to the plan.
As a fiduciary, you have probably engaged a number of vendors to provide services for the plan (e.g., trustee, investment advisor, record keeper, etc.). ERISA allows the plan to pay reasonable compensation for these necessary services, but it has not always been clear what the plan is paying, or the amount of compensation received by the service provider, especially when the plan does not write a check to pay for these services. In a new regulation requiring compensation disclosure to plan fiduciaries, the DOL has ruled that compensation is not reasonable unless it has been disclosed in writing by the service provider.
As of July 1, 2012, covered service providers are required to disclose to a plan fiduciary the amount of compensation received for services provided to the plan. By now, you should have received this fee disclosure from all of the plan service providers. If so, your obligation is to review this information and determine whether the compensation is reasonable for the services rendered. There are, of course, consultants to help analyze the fee disclosures. If the compensation seems high, then as a fiduciary you have a duty to renegotiate the fees or find a new provider.
If you have not received the fee disclosure from a service provider, or the information provided is inadequate, then the first thing you should do is to make a written request for the fee information. If you do not receive the information within 90 days following the written request, then you should notify the DOL of the failure and consider terminating the service provider. Otherwise, the plan will have engaged in a “prohibited transaction” in continuing to pay for services without a reasonable compensation arrangement with the service provider.
In addition to reviewing the compensation paid by the plan for services, you also have a duty to provide certain information to participants if the plan allows the participant to direct the investment of their individual account (like most 401(k) plans). Under a second new DOL regulation, the participant is entitled to receive information about their right to direct plan investments, disclosure of administrative expenses paid by the plan and fees that can be charged to their individual account, and details regarding the investment alternatives available under the plan.
As a plan fiduciary, you now have a duty to disclose this information to participants in the plan, so that the participant can make informed investment decisions for their account. While many service providers have prepared sample notices that can be used to satisfy this disclosure obligation, you are responsible for providing the required information to participants. If you fail to provide the required disclosure to participants, you can be held personally liable for breaching your fiduciary duty under ERISA.
For calendar year plans, the required disclosure must be provided to participants no later than August 30, 2012. The information must also be provided to new plan participants, and updated at least annually or in advance of any change. Quarterly statements must also include information about fees and expenses charged to the participant’s account, beginning with the statement provided by calendar year plans for the third quarter of 2012. If you are relying on your service provider to prepare this disclosure for your participants, you should make sure that the disclosure includes all required information about the plan, and that it will be distributed to participants before the required deadline.
By issuing these two new regulations, the DOL wants plan fiduciaries to be aware of the fees being paid by the plan for services, and wants participants to be aware of the plan’s administrative expenses and costs of the investment alternatives available through the plan. As a result of the new disclosure requirements, the DOL hopes that fiduciaries will be able to lower the cost of their plans, and participants can accumulate more assets for retirement. That is a big undertaking for plan fiduciaries, so you better not wait until after Labor Day to get started. Enjoy the summer!