Industry Insights

The U.S. Department of Labor (DOL) published interim final 408(b)(2) regulations on July 16, 2010, requiring retirement plan service providers to disclose comprehensive information about their fees and potential conflicts of interest by July 16, 2011; the due date was later extended to April 1, 2012.

These regulations require certain service providers for employee benefit plans to disclose information assisting plan fiduciaries in assessing the reasonableness of contracts, including the reasonableness of the service providers’ compensation and potential conflicts of interest that may affect the service providers’ performance. The Employee Retirement Income Security Act of 1974 (ERISA) requires plan fiduciaries, when selecting or monitoring service providers and plan investments, to act prudently and solely in the interest of the plan’s participants and beneficiaries and for the exclusive purpose of providing benefits and defraying reasonable administration expenses. Fundamental to a plan fiduciary’s ability to discharge these obligations is the availability of sufficient information that enables the fiduciary to make informed decisions about the services, costs and service provider.

Under ERISA regulations, the relationship between the plan and a service provider would generally be a prohibited transaction, because any person providing services to the plan is a “party in interest” to the plan. However, ERISA does have an exemption:  a relationship between the plan and a service provider is generally not considered a prohibited transaction if the service contract is reasonable, the services are necessary and reasonable compensation is paid.

If you haven’t already done so, you should begin working with your plan service providers to obtain the needed information for determining the reasonableness of the contracts, necessity of the services and reasonableness of compensation paid to service providers.

In addition, the DOL published final participant-level regulations on October 20, 2010, requiring plan administrators to disclose information about plan and investment costs to participants who direct their own investments. This regulation applies to plan years beginning on or after November 1, 2011, with a 60-day transition provision. In July 2011, the transition provision was linked to the 408(b)(2) regulations (the date service providers are required to provide fee information to employers). Therefore, for calendar year-end plans, annual plan information is due to participants beginning May 31, 2012, and quarterly investment disclosures are due to participants beginning August 14, 2012. The regulation requires plan fiduciaries to:

• Provide eligible participants with quarterly statements of plan fees and expenses deducted from their accounts
• Provide core information about investments available under the plan to eligible participants, including investment costs
• Use standard methodologies when calculating and disclosing expense and return information
• Present information in a format that allows for easier comparison between investment options

If you haven’t already done so, you should begin working with your service providers to ensure you comply with the disclosure deadlines. Some items to consider include:

• What information will be communicated
• When the information will be communicated
• What communication method will be used
• Who will send the information
• How the information will be formatted

There also is some good news related to the new fee disclosure rules; electronic delivery of fee information to participants will be permitted.

If you have any questions regarding these new fee disclosure rules, contact your BKD advisor.