Responsible fiduciaries of ERISA defined contribution or defined benefit plans should have received fee disclosures from each of a plan's covered service providers by July 1, 2012, as required pursuant to the Department of Labor's final regulations under ERISA Section 408(b)(2) (the "408(b)(2) regulations"). Plan fiduciaries with responsibility to enter into, extend or renew a contract or arrangement with a covered service provider now must (1) review such disclosures to determine whether they satisfy the content requirements under the 408(b)(2) regulations, (2) request missing or inadequate disclosure information from the covered service providers, (3) determine whether the fees are reasonable and the services necessary for the establishment or operation of the plan, (4) report any disclosure failures to the DOL, and (5) terminate the service contracts in some cases. By satisfying such requirements, responsible plan fiduciaries will avail themselves of the prohibited transaction exemption provided under ERISA Section 408(b)(2) for reasonable service contracts or arrangements between a plan and a service provider. Failure of a plan to pay reasonable fees for necessary services will result in a prohibited transaction that may subject the plan's responsible fiduciaries to taxes, penalties, equitable relief and litigation risks. The following summarizes action steps that a responsible plan fiduciary will need to take to comply with the prohibited transaction exemption.
- Identify all potential service providers who have entered into
(or are entering into) contracts or arrangements with covered
plans.
- Review the fee disclosures received from covered service
providers against the initial disclosure requirements under the
408(b)(2) regulations. The regulations can be accessed at http://www.gpo.gov/fdsys/pkg/FR-2012-02-03/pdf/2012-2262.pdf.
The disclosures must describe with respect to the covered service
provider's contract or arrangement with the covered plan:
(1) the services to be provided, (2) the provider's status as
an ERISA fiduciary or registered investment advisor, if applicable,
(3) the types and amounts of compensation that the provider
reasonably expects to receive with respect to its services to the
plan and the manner of receipt of such compensation,
(4) various investment-related disclosures, if applicable, and
(5) additional record-keeping disclosures, if applicable.
- With respect to covered service providers who have not
furnished any fee disclosures or who have furnished inadequate fee
disclosures, write to such service providers to request that they
furnish the required information. Such a request must be made
"upon discovering that the covered service provider failed to
disclose the required information." Although no specific
time frame is imposed, requests should be made within a reasonable
time, taking into account relevant circumstances (e.g., the number
of fee disclosures to review). Considering that disclosures
were due July 1, if a responsible plan fiduciary has not yet
started reviewing fee disclosures and requesting missing or
inadequate information from the covered service providers, the
process should be initiated now.
- Assess whether the fees are reasonable and the services
necessary. This may require assistance from the covered
plan's investment advisors or consultants who can benchmark the
fees against those charged by other providers for similar
services.
- Notify the DOL of any service providers who fail to comply with
the fee disclosure requests. Notice to the DOL must be made
no later than 30 days following the earlier of (1) the service
provider's refusal to furnish the requested information or (2)
90 days after the request is made. The notice must also
satisfy the applicable content requirements under the 408(b)(2)
regulations. Notice may be made via mail at U.S. Department
of Labor, Employee Benefits Security Administration, Office of
Enforcement, P.O. Box 75296, Washington, DC 20013, or via the
DOL's website at http://www.dol.gov/ebsa/regs/feedisclosurefailurenotice.html
(which includes a model notice and other useful information).
- With respect to covered service providers that fail to comply with fee disclosure requests, evaluate whether to terminate the service contract or arrangement. If the requested information relates to future services, the service contract generally should be terminated as soon as possible, consistent with ERISA's fiduciary duties.
Responsible plan fiduciaries need to act now to comply with the 408(b)(2) regulations. At the same time, applicable fiduciaries of participant-directed individual account plans (e.g., 401(k) plans) must also be taking steps to ensure that they comply with the participant-level fee disclosure requirements under ERISA Section 404(a) by August 30 (for most plans, including calendar year plans).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.