Plan fiduciaries have a responsibility to make sure that the plan is not overpaying for services, but until now it has been difficult for them to get the information necessary for them to evaluate and compare fee arrangements. In July, the U.S. Department of Labor issued final regulations requiring mandatory disclosures of fees received by pension plan service providers and their affiliates to the fiduciaries who hire them.
These regulations give fiduciaries leverage and actually require them to obtain detailed information about direct and indirect fees. Although they are not effective until July of next year, the regulations will apply to all pension plans – not just to 401(k) plans – and to all arrangements in existence on the effective date. The increased transparency required by the regulations could potentially lead to lower fees for all U.S. pension plans.
Preparing for compliance is essential for covered service providers, such as plan investment managers, recordkeepers and trustees, since their non-compliance will be reported to the Department of Labor and subject them to excise taxes. The regulations even require limited disclosure by managers of private equity funds, such as most hedge funds, that are treated as investing plan assets under U.S. Department of Labor (DOL) regulations.
If you are a plan fiduciary, such as a 401(k) or pension plan committee member, you also need to know these rules, since the Employee Retirement Income Security Act (ERISA) prohibits entering into service contracts with parties in interest unless the services are necessary and the arrangement and compensation are reasonable. The regulations take the position that an arrangement is not reasonable if this mandatory information has not been obtained, though it remains to be seen whether courts will follow that analysis. Fiduciaries must request information from the service providers if it is not provided in a timely manner, and report non-compliance to the U.S. Department of Labor in order to avoid causing the plan to engage in a prohibited transaction with potential liability for losses.
If you are a covered plan service provider, including the manager of an investment fund which is treated as holding "plan assets" under ERISA regulations, you must now prepare to provide a large amount of new information. The requirements generally include:
- a description of all services provided to the plan and whether they will be provided as a fiduciary or registered investment adviser;
- all direct and indirect compensation that the service provider, any affiliate or subcontractor expects to receive;
- if the provider is an investment fiduciary, broker or recordkeeper, a description of any compensation such as 12b-1 fees that will be paid among related parties;
- a description of any compensation reasonably expected on termination of the contract, such as insurance contract surrender fees; and
- a description of the manner in which compensation will be received, such as by billing or direct deduction from plan assets.
Although the regulations do not have a section on revenue sharing, special rules for recordkeeping services will require disclosure of typical revenue sharing arrangements. If these services will be provided in whole or in part without explicit compensation, or if compensation is offset, such as by funds received by mutual fund managers or subject to rebates, the recordkeeper must give a detailed explanation of the services provided and disclose the fee that would be charged for such services if no offsets or rebates applied.
There is no legal requirement that there be a written contract provision setting forth these new obligations, but prudent fiduciaries and service providers will want to have appropriate written agreements in place before the new rules become effective. And while the regulations do not technically apply where all plan fees – including indirect fees – are paid by the plan sponsor, it is difficult to believe that plan sponsors will not require service providers to give them at least the same information as is legally required when fees are paid from plan assets.
It is still possible that legislation such as that discussed in my June 15 post will require further or different fee disclosures, although Congress again failed to pass this legislation at its last session. And we are still awaiting final DOL regulations on required disclosures to participants, so it remains to be seen whether the DOL will require that participants have automatic access to all of this information.
Carol Buckmann has practised in the employee benefits field for over 25 years, advising clients on all aspects of employee benefits and retirement plans, including questions relating to 401(k), defined benefit and employee stock ownership plans, welfare plans, fiduciary responsibility, prohibited transactions and plan asset issues arising in investment fund formation.
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