New regulations requiring 401(k) plan service providers to disclose fees to plan sponsors went into effect on July 1, 2012. The burden now shifts to retirement plan sponsors, who are required both to:
- 1. ensure that they’ve actually received the information they need, and
2. evaluate the fees to determine whether or not they are reasonable for services provided.
With that in mind, here’s a roundup of legal commentary and analysis on the disclosure rules and sponsor obligations:
Reminder: Upcoming Obligations on Retirement Plan Sponsors and Administrators Regarding Fee Disclosure (Patterson Belknap Webb & Tyler LLP):
“The Service Provider Fee Disclosure Regulations … require covered service providers to disclose certain information to ERISA retirement plan fiduciaries about the services they will provide to the retirement plan and the compensation they will receive, including indirect compensation from sources other than the plan. The DOL has said that the purpose of the disclosures is to enable responsible plan fiduciaries to understand the services, assess the reasonableness of the compensation (direct and indirect) received by the service providers, and identify any conflicts of interest that may impact the service provider’s performance.” Read on>>
“The information required to be disclosed by investment managers to ERISA clients generally includes: (i) a description of the services to be provided; (ii) a statement of fiduciary and/or registered investment advisor status, as applicable; (iii) a description of the ‘direct’ and ‘indirect’ compensation (as discussed below) that the manager, and any affiliate or subcontractor of the manager, will receive; (iv) a description of any compensation to be received in connection with termination of the contract; and (v) the manner of payment of any compensation.” Read on>>
Reminder of Immediate Obligations for Plan Sponsors After Receiving Retirement Plan Fee Disclosures (Franczek Radelet P.C.):
“… after a plan sponsor has determined that it has received all required disclosures from a service provider, the sponsor must then determine whether each service arrangement is reasonable in light of the compensation information that has been disclosed. This can be done with input from the sponsor’s outside advisors, but a plan fiduciary must make the ultimate determination of whether a service arrangement is reasonable. If the plan sponsor determines that continuing a service arrangement is not reasonable, the plan sponsor must terminate the service provider. Plan sponsors should have a process in place to make these determinations. This process should be under way for most plan sponsors.” Read on>>
“The Final Regulations generally define ‘covered plans’ as ERISA-covered pension plans, both defined contribution and defined benefit plans. Covered plans do not include individual retirement accounts (IRAs), governmental pension plans or any other plans or accounts that are exempt from coverage under ERISA. The Final Regulations define ‘covered service providers’ generally as any service provider that enters into a contract or arrangement with a covered plan and reasonably expects to receive $1,000 or more in ‘compensation’ (direct or indirect) in connection with certain services provided to that covered plan.” Read on>>
Providers Showed You Their 401(k) Fees: Now, What Should You Do About It? (Osler, Hoskin & Harcourt LLP):
“[If] nothing was sent by the service provider: This is a serious problem, because it suggests that the provider is not aware of compliance requirements. Fiduciaries should immediately request the required information in writing, and if it is not received within 90 days, must report the noncompliance promptly to the DOL. If they do not do so, the DOL has taken the position that they have caused the plan to enter into a prohibited transaction. The DOL has provided a model notice for this situation, which may be filed electronically. The DOL has also stated that it is necessary to replace a service provider who does not comply with the new rules.” Read on>>
What To Do with the Plan Level Fee Disclosures (Bryan Cave):
The failure of a plan to pay reasonable fees for necessary services will result in a prohibited transaction. Prohibited transactions subject the plan’s fiduciaries to taxes, penalties and litigation risks. The fees of a covered service provider which fails to satisfy the fee disclosure rules will be deemed unreasonable and thus subject to the prohibited transaction consequences described above unless plan fiduciaries promptly and properly address the failure in the manner discussed in the section entitled, ‘If Disclosures are Incomplete.’” Read on>>
Private Investment Funds Update – June 2012 (Proskauer Rose LLP):
“Investment advisers required to make the disclosure must promptly update changes (generally no later than 60 days from the date the adviser is informed of the change) to previously disclosed information (other than the plan asset fund investment-related information described directly above, which must be updated at least annually). Covered service providers also must furnish, upon request, any other information relating to the compensation it received that is required for the ERISA plan to comply with the reporting and disclosure requirements of ERISA (e.g., Form 5500 reporting).” Read on>>
July 1 Deadline Approaches for Disclosure of Compensation and Fees to ERISA Plans (Katten Muchin Rosenman LLP):
“The Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (the Code) each contain rules about “prohibited transactions” involving employee benefit plans. (These rules are similar, but not identical, in the two statutes.) Under ERISA, a fiduciary is prohibited from engaging in a prohibited transaction, to the point of having to unwind it, and the Code imposes excise taxes on the transaction. As a result, avoiding prohibited transactions is an important part of plan administration and providing services to plans. ERISA and the Code contain a number of statutory exemptions for categories of transactions that would otherwise be prohibited transactions.” Read on>>
DOL Issues Direct Final Rule Related to Service Provider Disclosures (Katten Muchin Rosenman LLP):
“… effective September 14, 2012, the DOL will eliminate the previously available email address for notification submissions, and will instead provide a dedicated link on the DOL’s website, where fiduciaries may electronically submit the notifications. The new dedicated link can be accessed here. The DOL stated that the web-based submissions will provide immediate confirmation to plan fiduciaries that their notice has been received.” Read on>>
- DOL’s Recent Guidance on New Participant Fee Disclosure Regulations Is a “Must Read” for Retirement Plan Fiduciaries Preparing for the August 2012 Deadline – Littler
- New Participant Disclosure Rule for Self-Directed ERISA Plans Effective August 30th – Sheehan Phinney Bass + Green PA
- Service Provider Fee Disclosures – Are You Ready? – Warner Norcross & Judd
- Fees Disclosures Are Here, Now What? Plan Sponsor’s Responsibilities Going Forward – Gary Young
- Service Provider Contracts Deserve and Require Employers’ Attention – Warner Norcross & Judd
- Why Plan Sponsors Shouldn’t Have Too Much Loyalty to Their Plan Providers – The Rosenbaum Law Firm P.C.
- ERISA Legal News – 2nd Quarter, 2012 • Volume 3, Number 2 – Dickinson Wright
- Retirement Plan LegalEase – The Rosenbaum Law Firm P.C.
- The ERISA Litigation Newsletter – July 2012 – Proskauer Rose LLP
- How an Employer Can “Reboot” Their 401(k) Plan – The Rosenbaum Law Firm P.C.
- More Oversight for 401(k) Brokerage Windows – Warner Norcross & Judd
- Errors that Retirement Plan Sponsors Should Avoid But Do Anyway – The Rosenbaum Law Firm P.C.
- Calendar Year Plans Need to File Form 5500 by July 31, 2012 – Ford & Harrison LLP
- Southeastern Erisa Watch: Recent Decisions in the 4th and 11th Circuits – Womble Carlyle Sandridge & Rice, PLLC
- Puerto Rico Retirement Plans: Issues Employers Should Think About in 2012 – McDermott Will & Emery
- An ERISA Lesson Learned the Hard Way: Tussey v. ABB, Inc. – Warner Norcross & Judd
- The Ultimate Retirement Plan Sponsor Checklist – The Rosenbaum Law Firm P.C.
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