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Employers May Have Disclosure Obligations Under Recent DOL Regulations

    Client Alerts
  • May 02, 2012

The U.S. Department of Labor ("DOL") recently finalized fee disclosure rules requiring disclosures both by service providers to fiduciaries of qualified retirement plans and by plan administrators of defined contribution plans that permit participant direction of investments to participants and beneficiaries. These regulations may require employers that charge certain expenses to their retirement plans to disclose those expenses to the plan fiduciaries.

In summary, the following disclosures are now required by these dates:

July 1, 2012 - first disclosure of fees by service providers - including employers - to plan fiduciaries. Thereafter, fee disclosure is required reasonably in advance of the date a contract is entered, extended or renewed. This requirement applies to all types of retirement plan, both defined benefit and defined contribution.

August 30, 2012 - initial participant notice of plan investment-related information to participants and beneficiaries for calendar year plans and non-calendar year plans with plan years beginning between November 1, 2011 and July 1, 2012. The initial notice for plans with plan years beginning after July 1, 2012 is due 60 days following the first day of the plan's 2012 plan year. Thereafter, notice is required on or before the date a participant is first eligible to direct plan investments and annually.

November 14, 2012 - first quarterly disclosures to participants and beneficiaries of actual administrative and individual expenses charged to their accounts for calendar year plans and most non-calendar year plans. The ongoing due date is 45 days after the end of each quarter.

Most service providers are preparing for the necessary disclosures of their services and compensation. At the same time, service providers are working with employers to prepare appropriate initial and quarterly participant disclosures, which must include not only expenses related to the investment alternatives under a plan but also general administrative expenses that are charged against participants' accounts but not included in the total annual operating expenses of any investment alternative and the basis on which such amounts are charged (for example, per capita or pro rata). These latter expenses may include legal, accounting, recordkeeping, other similar expenses, and in some cases an employer's own internal plan-related expenses. Service providers that perform allocations generally are able to include all of these expenses in participant disclosures since they are directly involved in allocating expenses to participant accounts.

However, employers that charge internal plan-related expenses to their retirement plans also should be aware of their responsibility under the DOL regulations to disclose the services they provide and the compensation they receive from their retirement plans to the plan fiduciaries. This disclosure requirement applies regardless of whether the plan is participant-directed or not, such as a pension plan.

The prohibited transaction rules under the Employee Retirement Income Security Act ("ERISA") prohibit a plan fiduciary from causing a plan to enter into a transaction with a "party in interest" - such as the employer - that results in direct or indirect furnishing of goods, services or facilities between the plan and the party in interest. However, ERISA also exempts from these rules reasonable arrangements with a party in interest for services necessary for the operation of a plan as long as no more than reasonable compensation is paid for such services. The preamble to the DOL's regulations on disclosures by service providers states that such an arrangement automatically will not be exempt if the services and related fees are not disclosed to a plan fiduciary. Therefore, in order to continue providing services to its own plan, an employer must disclose the fees charged for its services to the appropriate plan fiduciary by not later than July 1, 2012.

Because of the new rules, employers that charge internal plan-related expenses to their qualified retirement plans should prepare to make these disclosures on a timely basis.

Service providers that fail to provide required fee disclosures will be in violation of ERISA's prohibited transaction rules and subject to penalties. Fiduciaries who fail to provide required fee disclosures to participants will be in breach of their fiduciary obligations under ERISA and potentially liable for losses to participants as a result of the failure to disclose.