On March 11, 2014, the Department of Labor (DOL) issued a proposed amendment to the fee disclosure regulations under Section 408(b)(2) of ERISA.  This amendment requires covered service providers to supply a guide that assists plan fiduciaries in reviewing the fee disclosures required under the 408(b)(2) regulations if such disclosures are in multiple or lengthy documents.  Although the amendment is directed toward service providers to retirement plans, employers sponsoring retirements plans should also take note, because it represents the DOL’s continued focus on fees charged to plan participants and a plan fiduciary’s responsibility under ERISA to ensure the fees are reasonable.

Background on the final 408(b)(2) regulations

In 2012, the DOL released regulations under 408(b)(2) to help plan fiduciaries with their fiduciary responsibilities under ERISA to assess the reasonableness of compensation paid to retirement plan service providers. The 408(b)(2) regulations require a covered service provider to disclose to plan fiduciaries all compensation, whether direct or indirect, the service provider receives in connection with its services to the plan.  The regulations gave service providers the flexibility to provide the fee disclosures in different documents from various sources, as long as the documents collectively contained the required disclosures.  This flexibility resulted in some service providers furnishing lengthy and cumbersome fee disclosures, some consisting of multiple documents, which made it difficult for plan fiduciaries to find the relevant information.

After reviewing examples of fee disclosures provided by service providers and gauging the reactions of plan fiduciaries, the DOL proposed the current amendment to the 408(b)(2) regulations, which would require service providers to furnish a guide that identifies the sections in which relevant information is provided.  The DOL believes this guide would simplify the fiduciaries’ review of the service providers’ fees.

Requirements of the proposed amendment

Under the proposed amendment, a service provider would be required to furnish a guide, not a summary, that discloses the location of all principle data elements required by the 408(b)(2) regulations.  This guide would be provided as a separate document. However, if a service provider already discloses the information in a concise, single document, then it would not be required to provide a separate guide.  The proposed regulations do not specify what constitutes a “concise” document, but the DOL has solicited comments regarding the number of pages a single document may be before a separate guide is required. 

The guide would have to provide a specific locator to enable the plan fiduciary to find the following information in the service provider’s fee disclosure documents:

  • a description of services to be provided;
  • a statement concerning services to be provided as a fiduciary and/or as a registered investment adviser;
  • a description of all direct compensation;
  • a description of all indirect compensation;
  • a description of any compensation that will be paid among related parties;
  • a description of any compensation for termination of the contract;
  • a description of all compensation (and/or a reasonable estimate of the cost to the plan) for recordkeeping services; and
  • the required investment disclosures for fiduciary services, recordkeeping and/or brokerage services, including annual operating expenses and ongoing expenses, or, if applicable, total annual operating expenses.

The locator must identify the document in which the information is located as well where the information is within that document (e.g., the section title).  The DOL is seeking comments on the use of two alternative locators: (i) a document and page requirement or (ii) a “sufficiently specific” locator.

For information that is electronically disclosed, the service provider cannot merely furnish a link to a separate contract.  It must provide a more specific link directly to the required information, or provide a page or other sufficiently specific locator in addition to an electronic hyperlink.

What this means for employers

Although the proposed amendment is directed toward covered service providers, employers who sponsor retirement plans should also take note.  First, the amendment highlights the DOL’s continued focus on fees charged to plan participants and a plan fiduciary’s responsibility under ERISA to ensure that compensation paid to service providers is reasonable.  The DOL believes the guide required under the amendment will make it easier for plan fiduciaries to review the fees charged to the plan and will, accordingly, expect fiduciaries to evaluate the fees being disclosed.  Second, the key elements required to be pinpointed in the guide represent the information that the DOL believes is critical in evaluating whether compensation paid to a service provider is reasonable.  Plan fiduciaries should, therefore, be sure to review each of these elements as they evaluate their service providers’ fees.