Last week the Department of Labor ("DOL") released interim final regulations ("Interim Rule") that require specific disclosures from certain service providers of retirement plans to plan fiduciaries. Such disclosures should assist plan fiduciaries in assessing the reasonableness of contracts or arrangements, including the reasonableness of the service providers' compensation and potential conflicts of interest that may affect the service providers' performance. The Interim Rule is aimed at aiding plan fiduciaries in discharging their duties to act prudently and solely in the interest of plan participants and beneficiaries and for the exclusive purpose of providing benefits and defraying reasonable expenses in administering the plan.
It is worth noting that the Interim Rule treats pension and welfare plans differently. The Interim Rule provides disclosure requirements applicable to contracts or arrangements for pension plans, but DOL has yet to provide guidance on contracts or arrangements relating to welfare plans. However, DOL indicated that it will provide welfare plan fee disclosure guidance at a future date.
The Interim Rule applies to covered plans ("Covered Plans") and "service providers" ("Service Providers") that provide certain services to the Covered Plans. Covered Plans include employee pension benefit plans except governmental plans, simplified employee pension plans, simple retirement accounts, individual retirement accounts and individual retirement annuities. Covered Plans also include 403(b) plans subject to ERISA.
The Interim Rule defines a Service Provider as a provider that enters into a contract or arrangement with the Covered Plan and reasonably expects $1,000 or more in compensation, whether it be direct or indirect, to be received in connection with providing certain services pursuant to the contract or arrangement. Therefore, under the Interim Rule, those providers who expect $1,000 or less in compensation do not have to provide the necessary disclosures to plan fiduciaries.
The Interim Rule is effective on July 16, 2011 (the "Effective Date"), although DOL is requesting comments during the next 45-day period. The Interim Rule applies to contracts or arrangements between Covered Plans and Service Providers as of the Effective Date, regardless of whether the contract or arrangement was entered into prior to the Effective Date. This means that for contracts or arrangements entered into prior to the Effective Date, Service Providers must furnish the required disclosures no later than the Effective Date.
The Interim Rule does not require a formal written contract delineating the disclosure obligation. However, the Interim Rule requires Service Providers to disclose, in writing, the following information to a responsible plan fiduciary:
- a description of the services provided by the Service Provider;
- that the Service Provider is providing the services as a fiduciary, if applicable;
- a description of: a) all direct and indirect compensation expected for the services, b) any compensation that will be paid if the services are to be provided on a transaction basis and c) any compensation that the Service Provider expects to receive in connection with termination of the contract or arrangement;
- a description of all compensation (as described above) for all recordkeeping services, if applicable;
- the manner of receipt for such compensation;
- if a Service Provider is providing fiduciary services, disclosures regarding each investment contract, product or entity that holds plan assets and in which the covered plan has a direct equity investment; and
- if a Service Provider is providing recordkeeping or brokerage services, disclosures regarding each designated investment alternative for which recordkeeping or brokerage services will be provided.
Service Providers must make the disclosures reasonably in advance of the date the contract or arrangement is entered into, extended or renewed. The Interim Rule allows for circumstances in which disclosures become required after the contract or arrangement begins. Additionally, if there is a change in information, the Service Provider must disclose it as soon as practicable, but not later than 60 days from the date the provider is informed of the change.
If a Service Provider does not make the proper disclosures to the Covered Plan, the contract or arrangement between the Service Provider and the Covered Plan is not a reasonable contract which would make the furnishing of the services and the receipt of payment for the services a prohibited transaction under ERISA. The Interim Rule includes a class exemption from the prohibited transaction provisions of ERISA. Under the Interim Rule, if a plan fiduciary enters into a contract without knowing that the Service Provider has failed to comply with its disclosure obligations and the plan fiduciary reasonably believed that the Service Provider disclosed the information required under the Interim Rule, the fiduciary will not be liable for any failure by a Service Provider. If a plan fiduciary discovers that a Service Provider failed to disclose the required information, the plan fiduciary must request in writing that the Service Provider furnish it. If the Service Provider fails to respond to the plan fiduciary's request within 90 days of the request, the plan fiduciary must notify DOL of the failure. DOL has provided a sample notice plan fiduciaries may use for this purpose.
In light of the release of the Interim Rule, plan sponsors should acquaint themselves with its requirements and consult with their Service Providers to ensure that the proper disclosures on existing and new contracts and arrangements will be made to plan fiduciaries once the Interim Rule is finalized.
The text of the Interim Rule may be found here. The sample notice may be found here.