In our August 10, 2010, Compensation and Benefits Alert, we described the July 16, 2010, Interim Final Regulations under ERISA §408(b)(2) that would require service providers to ERISA retirement plans to disclose specific fee and services information to designated plan fiduciaries. The original regulation was supposed to be fully implemented and disclosures were to be provided by July 16, 2011. In June 2011, the Employee Benefits Security Administration (EBSA) proposed extending the effective date to January 1, 2012, to give service providers additional time to comply with the fiduciary disclosure requirements. On July 16, 2011, the EBSA issued final rules regarding fiduciary disclosures that extend the effective date for the initial disclosures in compliance with the Final Regulations to April 1, 2012. This should give service providers additional time to develop the format of the compliance disclosure document.
Shortly after the fiduciary disclosure regulations were issued, the EBSA issued additional participant disclosure requirements regarding investment fees under ERISA Sections 404(a) and 404(c). The original effective date of this regulation and the required additional disclosures was to be April 1, 2012. The EBSA believes that the initial participant disclosures pursuant to the final ERISA §404(a)(2) regulations should not be required before the fiduciaries receive their first service provider disclosures. The reason is that the information received by the plan fiduciaries will be needed to populate disclosure statements to participants. For more information, see our December 16, 2010, Employee Benefits and Compensation Alert on final regulations on participant fee disclosures.
The effective date of the ERISA Section 404(a) participant fee disclosure regulations has not changed and remains the first plan year beginning on or after October 31, 2011. However, the first annual fee disclosure to participants will not be due before May 31, 2012 (60 days after the effective date of the 408(b)(2) regulations). The deadline for the first quarterly disclosure is 45 days after the end of the quarter in which the plan provides the initial disclosures, so August 14, 2012, would be the due date of the first quarterly expense disclosure for calendar year plans.
A plan service provider's failure to comply with the required fiduciary disclosures when the rules become effective will be a prohibited transaction, and service providers will be subject to Department of Labor and IRS enforcement, including excise tax penalties. Plan fiduciaries are expected to solicit the required disclosures from their service providers, and failure to do so could expose trustees and other plan fiduciaries to prohibited transaction excise taxes as well as potential fiduciary breach actions.
How Do These Rules Affect an In-House Trustee or Investment Committee Member?
If the trustee and other plan fiduciaries want to rely on participant direction as a defense in the event of claims for investment losses, compliance with the participant fee disclosures is important. The Department of Labor believes the amount of fees paid on a particular investment is material information that should be considered by a plan participant before a participant makes a decision to invest in a plan fund option. The service provider disclosures to fiduciaries are considered necessary for fiduciaries to determine if fees being paid by a plan are "reasonable."
Notwithstanding the extended effective dates, in-house plan fiduciaries should be discussing these new rules now with their plan service providers including plan investment advisors and managers, plan record-keepers, auditors and custodians—to ensure compliance by the proper date.