Earlier this month, the Department of Labor (DOL) released the long-awaited final service provider fee disclosure regulation under Section 408(b)(2) of ERISA.
Section 408(b)(2) of ERISA sets forth an exemption from ERISA’s so-called “prohibited transaction” rules enabling service providers to perform multiple services for ERISA-covered retirement plans. In general, to qualify for the exemption, service providers must disclose the nature and cost of their proposed arrangement. In recent years, the DOL became increasingly concerned that the existing regulations were not sufficient to ensure that all fees were disclosed in a manner that would enable plan fiduciaries to make informed decisions, particularity in light of the proliferation of fee sharing arrangements. The redesigned 408(b)(2) regulation requires covered service providers receiving direct or indirect fees from a plan to make written disclosures of their services, their status with respect to the plan and the amount of their direct and indirect compensation. The DOL initially proposed the regulation in 2007 and then released it as an interim final regulation in July 2010.
In the 2010 release, the DOL invited comments on several issues, and it was widely anticipated that amendments would be made to the regulation. Among the most important changes in the final 408(b)(2) regulation are the following:
- Extension of the deadline for providing the covered disclosures by three months, from April 1, 2012, to July 1, 2012.
- Clarification that service providers are not required to provide a summary of the disclosures (although the DOL did provide a “Sample Guide” as an appendix to the final rule to encourage service providers to assist plan fiduciaries with their review of required disclosures).
- The addition of a requirement to describe to a specified “responsible plan fiduciary” the arrangement between the service provider and payer of indirect compensation.
- Clarification that electronic disclosure of the required disclosures is permitted.
- Relief from the disclosure requirements for certain 403(b) contracts.
- Changes to the disclosure requirements with respect to certain investment-related disclosures.
- The addition of a requirement that plan sponsors terminate the relationship with a service provider that fails or refuses to provide information on request.
The last requirement noted is somewhat unexpected and is likely to have a significant effect upon fiduciary conduct. Fiduciaries that do not terminate arrangements with non-compliant providers will face exposure to DOL enforcement activities, as well as participant lawsuits, and potential liability for prohibited transaction excise taxes. Many industry practitioners agree that the 408(b)(2) regulation is one piece – albeit a rather large, landscape-shifting piece – of a larger effort by the DOL and the Securities and Exchange Commission to regulate hidden fees and other self-interested and conflicted arrangements between retirement plans and their service providers.