Section 408(b)(2) of ERISA provides relief from ERISA’s prohibited transaction rules for service contracts or arrangements between a plan and a provider of services to the plan if, among other things, the contract or arrangement is “reasonable.” On Dec. 13, 2007, the Department of Labor (“DOL”) proposed a new regulation under this section to impose disclosure requirements on plan service providers as a condition of compliance with the statute’s “reasonableness” requirement. According to this proposal, an arrangement involving a specified type of service provider would not be deemed to be “reasonable” unless the service provider agrees to disclose certain information to the plan fiduciary with authority to cause the plan to enter into, extend, or renew the contract or arrangement for the provision of the services to the plan. Prior guidance under section 408(b)(2) of ERISA would also continue to apply in determining whether such an arrangement is “reasonable.”
Under the proposed regulation, the new disclosure requirements would apply only to those service providers that:
- Provide, or may provide, services to the plan as fiduciaries under either ERISA or the Investment Advisers Act of 1940 (the “Advisers Act”);Outline operational requirements for deferral elections
- Provide, or may provide, banking, consulting, custodial, insurance, investment advisory, investment management, recordkeeping, securities brokerage, or third-party administration services to the plan; or
- Receive, or may receive, indirect compensation or fees for accounting, actuarial, appraisal, auditing, legal, or valuation services to the plan.
Affected service providers would be required to give the responsible plan fiduciary certain advance written disclosures relating to fees and conflicts of interest. This notice, which would have to be updated after any material changes, would be required to describe:
- All services to be provided to the plan;
- The compensation or fees, including indirect compensation, to be received by the provider (as well as its affiliates, agents, or employees), for each service;
- The manner of receipt of such compensation or fees;
- Whether the provider or an affiliate is providing fiduciary services within the meaning of ERISA or the Advisers Act;
- Whether the provider or an affiliate expects to participate in or acquire a financial or other interest in any transaction to be entered into by the plan in connection with the contract;
- Whether the provider or an affiliate has any material financial, referral, or other relationship with a money manager, broker, or other client of the service provider, another service provider to the plan, or any other entity where such relationship does, or may, cause a conflict of interest;
- Whether the service provider or an affiliate will be able to affect its own direct or indirect compensation, without prior approval of an independent plan fiduciary; and
- Whether the service provider or an affiliate has in place any policies or procedures designed to prevent the compensation or fees, relationships, or conflicts from adversely affecting its services to the plan.
Additionally, on the same day that it released its proposed regulation under section 408(b)(2) of ERISA, DOL published a proposed class exemption that would provide relief to a plan fiduciary who enters into a contract that is not “reasonable” because, unbeknownst to the plan fiduciary, the service provider failed to comply with its disclosure obligations under the final regulation. Comments on the proposed regulation and/or class exemption are due by Feb. 11, 2008.