What plan sponsors and plan participants can expect from the Department of Labor’s final 408(b)(2) rules.
Under the Employee Retirement Income Security Act of 1974 (ERISA), private pension plan fiduciaries are required to act prudently and solely in the best interest of plan participants and beneficiaries. Responsible plan fiduciaries must ensure that arrangements with plan service providers are “reasonable” and that only “reasonable” compensation is paid for services. In order for fiduciaries to discharge these obligations, they must obtain information sufficient to make informed decisions about an employee benefit plan’s services, the cost of these services and the service providers.
The Department of Labor (DOL) issued a final regulation under ERISA Section 408(b)(2) that establishes, for the first time, specific disclosure obligations for plan service providers. The rules help ensure that responsible plan fiduciaries have the information they need to make better decisions when selecting and monitoring service providers for their plans.
A LITTLE BACKGROUND
• ERISA was enacted to protect the interests of employee benefit plan participants and their beneficiaries, addressing public concern that funds of private pension plans were being mismanaged and abused.
• In recent years, arrangements for how services are provided to employee benefit plans and how service providers are compensated (e.g., through revenue sharing and other arrangements) have become increasingly complex.
• Many of these changes have improved efficiency and reduced the costs of administrative services and benefits for plans and their participants. However, the complexity resulting from these changes has made it more difficult for many plan sponsors and fiduciaries to understand how, and how much, service providers are compensated.
• The DOL published an interim final regulation on July 16, 2010, which has been replaced by the final regulation with minor changes and revisions.
FINAL REGULATION
• The final regulation applies to ERISA – covered defined benefit and defined contribution plans. It requires covered service providers (CSPs) to provide responsible plan fiduciaries (RPFs) with information they need to: (a) assess the reasonableness of total compensation (both direct and indirect), (b) identify potential conflicts of interest and (c) satisfy reporting and disclosure requirements.
• The final regulation applies to CSPs who expect to receive at least $1,000 in compensation for services to a covered plan and applies to:
– ERISA fiduciary service providers
– Registered investment advisers (both federal and state)
– Recordkeepers or brokers who make designated investment alternatives available
– Certain other providers who receive
indirect compensation
• Included with the final regulation is a class exemption from ERISA’s prohibited transaction provisions for RPFs that enter into service contracts without knowing that the covered service provider has failed to comply with its disclosure obligations. Responsible plan fiduciaries are required to notify the DOL of the disclosure failure in order to take advantage of the exemption.
DISCLOSURE REQUIREMENTS
• CSPs must provide a written disclosure to an RPF for a covered plan that describes the services to be provided and all direct and indirect compensation to be received by the provider, its affiliates or subcontractors.
• Direct compensation is compensation received directly from a covered plan, while indirect compensation generally is compensation received from any source other than the plan sponsor, the CSP, an affiliate or subcontractor.
• CSPs who disclose indirect compensation must describe the arrangement between the payer and CSP pursuant to which indirect compensation is paid, as well as identify the indirect compensation sources and the service to which the compensation relates.
• Compensation disclosures must include allocations of compensation made among affiliates or subcontractors, when the allocations occur due to charges against a plan’s investment or are set on a transaction basis.
• CSPs are required to disclose if they’re providing record-keeping services and the compensation attributable to this, even if no explicit charge for recordkeeping is part of the contract.
• Certain CSPs are required to disclose an investment’s annual and ongoing operating expenses, as well as total annual operating expenses for participant-directed individual account plans.
• Recordkeepers and brokers may provide current disclosure materials, or information replicated from such material, of an unaffiliated issuer or a designated investment alternative. The issuer must be a mutual fund, insurance company, issuer of a publicly traded security or a financial institution supervised by a state or federal agency.
• Electronic disclosure is permitted. However, such dis-closures must be on a website or other readily accessible electronic medium, and the RPF must have been clearly notified on how to access the information.
DOL ENCOURAGING A DISCLOSURE SUMMARY
• The Department of Labor is encouraging CSPs to offer responsible plan fiduciaries a guide to the initial disclosures. To that end, it included a sample guide as an appendix to the final regulation to be used on a voluntary basis. The department also advised that it intends to publish proposed regulations on the subject in the near future.
ONGOING OBLIGATIONS
• CSPs must disclose changes to initial information as soon as practicable, but no later than 60 days after the CSP learns of the change. Disclosure of changes to investment- related information is required at least annually.
• Upon the request of an RPF or plan administrator, CSPs must disclose compensation or other service arrangement- related information reasonably in advance of the date the person states that they must comply with ERISA’s reporting and disclosure requirements.
IF THERE IS A DISCLOSURE ERROR
• CSPs may correct good faith disclosure errors or omissions within 30 days from the date that the CSP learns of the error or omission.
EFFECTIVE DATE
• The final regulation becomes effective July 1, and applies to both existing and new contracts or arrangements between covered plans and CSPs.
• The July 1, effective date will impact when plan sponsors must first furnish disclosures under the ERISA 404(a)(5) participant level disclosure regulation. The effective date of this regulation is 60 days later, or August 30.
Clay Trenz, AAMS, Independent Financial Advisor. Raymond James, 121 NW Greenwood Ave., Suite 101, Bend, OR 97701. 541-382-1406. claytrenz.com. For an estate planning checklist, visit www.claytrenzEPC.com
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