Last week, the Department of Labor (“DOL”) issued a proposed regulation (Reasonable Contract or Arrangement Under Section 408(b)(2) – Fee Disclosure) that, upon adoption, would require contracts and arrangements between employee benefit plans (including 401(k) plans) and certain service providers to disclose information to plan fiduciaries to assist the fiduciary in evaluating the reasonableness of fees paid for services rendered to the plan and assess any potential conflicts of interest. The DOL has requested written comments on the proposed regulations on or before February 11, 2008.
Noting that there have been a number of changes in the way services are provided to welfare and retirement plans that have improved efficiency and reduced administrative costs, the proposed rule indicates that these changes have also made it more difficult for plan sponsors and fiduciaries to truly understand what the plan pays for a particular service. Unclear compensation is a significant issue for plan fiduciaries because ERISA Section 404(a)(1) provides that when selecting and monitoring services providers, a fiduciary must act prudently and solely in the interest of the plan’s participants and beneficiaries and for the exclusive purposes of providing benefits and defraying the reasonable expenses of administering the plan.
The proposed rule would amend the regulations under ERISA Section 408(b)(2) to clarify the meaning of a “reasonable” contract or arrangement. Under the proposed rule, in order for a contract or arrangement for services to be “reasonable”, all services furnished to the plan, and all compensation paid to the service provider, whether direct or indirect, must be disclosed to the plan fiduciary in writing. Service providers must agree to furnish and in fact furnish, the required information to the plan fiduciary who has the authority to cause the plan to enter into or extend or renew, a contract or arrangement for the provision of services to the plan.
According to Frank Del Barto, a member of the Firm’s Employment and Labor Practice Group, the proposed rule represents another initiative designed to ensure the full disclosure of all costs, commissions, administrative fees, and any other form of compensation paid. Frank notes that plan fiduciaries should recognize the ever increasing attention that is being placed on full disclosure of compensation and institute a program that periodically reviews all welfare and retirement arrangements.