On February 3, 2012, the Department of Labor's Employee Benefits Security Administration finalized regulations mandating that retirement plan vendors disclose all direct and indirect payments they receive for services provided with respect to employer-sponsored retirement plans.  These Regulations appear at §2550.408b-2, 77 Fed Reg. 5632, February 3, 2012, and are often referred to as the "408b-2 Rules."

The 408b-2 Rules are the final guidance needed before the industry makes enormous changes in the fee and investment disclosures given to participants who can direct investments.  Employers have been hearing from their vendors for months about the steps needed to gear up for detailed participant-level fee and investment disclosures; yet, until the 408b-2 Rules were finalized, service providers were not legally obligated to assist employers in this participant–level disclosure effort, leaving some (especially smaller) employers to their own devices to decipher and administer complex disclosure requirements.

Now, investment advisors, insurers, platform providers, brokers, and others who expect to receive more than $1,000 in compensation directly from, or indirectly with respect to, any retirement plan must disclose the services they provide, and what they get paid for those services, in writing, effective July 1, 2012.  The same effective date applies for both existing and new service arrangements. 

These vendor-to-employer disclosure rules apply to all ERISA-covered retirement plans, whether or not participants direct investments, and are intended to allow employers to fulfill their duty to assess the reasonableness of the compensation paid based on the quality of the services provided.  Failure to provide the information is a "prohibited transaction."   Employers may also be liable for prohibited transaction penalties (excise taxes) if they fail to ask for the information, or if they ask for it, do not receive it timely, and then either fail to report the violation to the DOL, or fail to "expeditiously" terminate the service arrangement when information is not forthcoming.

For more information on Service Provider Disclosure Requirements, please click here.

The participant-level fee and investment disclosures are sometimes referred to as the new "404a Rules," and are now effective August 30, 2012 rather than the prior May 31 compliance date.  These rules require annual and quarterly notices and apply only to plans covered by ERISA that have individual accounts and allow participant direction of investments.  They do not apply to defined benefit plans, SEPs, SIMPLEs, IRAs or plans where investment allocation decisions are made by a fiduciary rather than by participants.

For more information on Participant-Level Fee and Investment Disclosure Requirements, please click here.