No doubt you have seen articles by law firms and benefit advisors concerning the rules taking effect this summer requiring various disclosures of fees and investment information by retirement plan service providers to fiduciaries (ERISA § 408(b)(2)) and by fiduciaries to participants in participant-directed retirement plans (ERISA § 404(a)). Many of these articles are tinged with a sense of alarm, and for good reason. The Department of Labor’s regulations impose severe penalties when disclosure is not made in the manner required. This advisory sets forth a series of practical steps that plan sponsors and fiduciaries may follow to navigate these new and treacherous waters.


The new regulations impose duties on “responsible plan fiduciaries,” those who have the ability to hire and fire service providers, and on the ERISA plan administrator.

Unfortunately, plan documents often are not as clear as they should be about who is responsible for what. Many simply provide that the employer is the “administrator” and do not envision the designation of an individual or a committee to fulfill this critical job. (The administrator or plan administrator under ERISA is a fiduciary and is generally responsible for interpreting the plan, deciding claims and the like. A third-party administrator (or TPA) such as a recordkeeper is rarely if ever the administrator who is charged with ERISA fiduciary responsibility.) Many plans also do not contemplate the existence of a separate investment committee, a group dedicated to selecting and monitoring the investments made available under the plan. Simply having the employer acting in all of these capacities makes it unclear to all just who is responsible for what. Best practice is to clearly designate an individual or committee to serve as administrator and the same or a different group as the investment committee.


By July 1, 2012, retirement plan service providers must provide disclosure of their compensation arrangements to responsible plan fiduciaries. A failure to provide disclosure consistent with the new regulations may result in a “prohibited transaction,” even if the compensation is in fact reasonable (whatever that may mean). If there is a prohibited transaction, there will be a 15% civil penalty, the compensation will have to be repaid and the service provider may have to be removed.

In addition, and generally by August 30, 2012, plan administrators must provide an initial disclosure to participants of participant-directed plans of various fees and other performance and investment related information. Quarterly disclosures will thereafter be required. The plan administrator can delegate this authority, and our sense is that most recordkeepers are gearing up to provide the disclosure on behalf of plan administrators. Obviously, even if crafted by a third-party, the disclosure must adhere to the requirements established by the DOL and a failure to do so opens up the plan administrator to a breach of fiduciary duty claim and another potential civil penalty.  


The funds offered under the plan, and the plan’s fee structure, will soon be on full display. When was the last time you really looked at each fund’s performance, investment style and expense structure, as well as the overall package and cost of services being provided to the plan? At a minimum, funds should be reviewed annually; semi-annual or even quarterly review is better. At fund review meetings, each fund should be compared to a benchmark or peer group on a variety of criteria, and the review process should be documented in minutes. (The DOL always asks for these minutes in an audit.) The Investment Policy Statement should also be reviewed and updated from time to time, and it is also requested by the DOL in an audit.

A fund that is regularly or seriously underperforming relative to its peers should be carefully scrutinized to determine whether it should be replaced. And since the lead time to do this may often be six to eight weeks (depending on the recordkeeper), you should be reviewing, and possibly replacing, underperforming funds now.  


Participants may not understand all of the disclosure they are about to receive. The drafts we have seen so far, while generally compliant with the DOL’s new requirements, are not necessarily illuminating. Participants may not realize their retirement plan is not “free.” Or they may become overly obsessed with low cost funds. Invariably a money market fund is the lowest fee option available in a plan, but should a 25 year old be investing future retirement assets in a money market?  

Consider reaching out to participants in advance of the August 2012 deadline, explaining to them the context in which these new disclosure are being made. Most importantly, and if possible, consider providing them with additional investment education or tools to help them manage their accounts and understand the relevance and necessity for certain fees.  

And talk to your service provider about how, for example, its call center will handle questions from participants or how the new disclosures will be delivered. Electronic delivery is still a bit cumbersome when it comes to material required to be provided under ERISA.  


The new ERISA § 408(b)(2) regulations generally apply to any service provider who has entered into a contract or arrangement with a plan. Not sure who they are? In the case of a larger plan, start by looking at Schedule C of the last Form 5500. (Smaller plans are more likely to have a single vendor solution, and that vendor should be providing and/or coordinating all of the necessary disclosures.) That Schedule will include a list of those receiving at least $5,000 for the year, although the compensation threshold for disclosure under the new regulations is lower. A failure to receive full disclosure from an affected service provider means a prohibited transaction may have occurred.

While you are at it, see if you can find the service contract with each service provider. If you do not have one (neither ERISA generally nor the new ERISA § 408(b)(2) regulations require a written contract), consider entering into one. In Massachusetts, remember that any new or update of an existing contract needs to take into account the Massachusetts data privacy requirements. (See our advisory entitled “Massachusetts Data Privacy Grandfather Clause to Expire March 1, 2012.”) Service contracts should clearly state what services the provider will and will not perform, what those services cost, etc. If you have not yet received anything from each service provider, reach out to them now and ask about how they plan to comply with the new rules.


A review of the disclosure that your service providers are planning to issue may head off a lot of problems. With a sample in hand, a fiduciary (or its advisors) can review the applicable regulations and make sure everything required is there, before the stakes go up. Please contact one of us if you would like assistance in performing a compliance review of the disclosures.  


As suggested above with respect to plan investments, the compensation paid to service providers with plan assets should also be reviewed for reasonableness and with an eye open for any potential conflicts of interest. This is a task that may require outside help. Consider reaching out to a firm that can provide some benchmark statistics about the cost of operating a plan with similar demographics. (A single plan with $100 million of assets and 15,000 participants will likely have a very different cost profile than a single plan with $100 million of assets and 650 participants.)

Also consider actually putting the plan out to bid in an RFP process. You do not necessarily need to move the business from the existing service provider(s), but the process can yield some eye-opening results. An RFP we were involved in several years ago produced a range of fees from $145,000 to just over $400,000 for the same bundle of services.  


You can be sure that in future retirement plan audits the DOL will be looking for evidence of the receipt or delivery, as applicable, of all required disclosures and that the fiduciary(ies) reviewed and absorbed necessary information and followed up and/or took appropriate action. Document your process, in meeting minutes, letters, emails and the like.

You will want to be sure that you can provide all of this evidence on demand.  

* * * * *  

Plan vendors have been working for years on all of these new requirements. But the burden is about to shift in a big way to sponsors and other fiduciaries. Knowing what to do next is half the battle.