The U.S. Department of Labor (DOL) recently issued guidance that provides for modest delays in compliance with new requirements on participant and service provider fee disclosure. While this is welcome relief, plan fiduciaries, plan administrators, and service providers still need to continue their preparations to comply with these expansive new requirements in early 2012.
Background on New Requirements
As we discussed in prior WorkCite articles (linked below), the DOL rules impose two important new disclosure requirements affecting retirement plans.
First, certain service providers (covered service providers) to an ERISA-covered retirement plan must disclose to the plan's fiduciaries any compensation that they or their affiliates receive for those services (see "An Overview for Plan Sponsors and Fiduciaries of the New Requirements for Service Provider Arrangements"). If a covered service provider fails to provide the required disclosures, the plan's service contract or arrangement with that service provider will not be considered "reasonable" under ERISA. An unreasonable contract or arrangement is a prohibited transaction that is subject to penalties and could expose plan fiduciaries to liability.
Second, the plan administrator of an ERISA-covered defined contribution retirement plan that permits participant investment direction (such as a typical 401(k) plan) must regularly furnish to plan participants information about fees and expenses associated with their plan accounts and the plan's investment options (see Plan Administrators Should Prepare Now to Comply with New Participant Disclosure Requirements"). The new rules require plan administrators to provide both annual and quarterly notices that meet specific requirements for content, formatting, and timing. Plan administrators that do not comply with the disclosure requirements may be subject to liability for breaching their ERISA fiduciary duties.
New Effective Date for Service Provider Disclosure Rules
The updated DOL guidance defers the effective date for the covered service provider disclosure rules from January 1, 2012 to April 1, 2012. The new effective date reflects the fact that the DOL has not yet finalized the rules for such disclosures. Final rules are expected later this year, and they will apparently include a number of clarifications.
These rules will still apply to both defined benefit and defined contribution plans and, thus, will affect any employer that sponsors an ERISA-covered retirement plan. Plan fiduciaries should continue to work with covered service providers to obtain the required disclosures prior to the April 1, 2012, deadline. Equally important, plan fiduciaries should continue to plan a strategy to evaluate the covered service provider compensation information as part of the fiduciary process.
New Effective Date for Participant-Level Fee Disclosure Rules
These participant-level fee disclosure rules are still scheduled to take effect on the first day of the plan year that begins on or after November 1, 2011. However, the DOL has now established a special transition rule for when the first annual notice and the first quarterly disclosures must be provided once the rules take effect.
Initial Annual Notice
Under the transition rule, a plan must provide the initial annual notice by the later of May 31, 2012 or 60 days after the first day of the first plan year beginning on or after November 1, 2011. The annual notice must be provided to all participants.
Initial Quarterly Notice
The transition rule times the first quarterly disclosure under the new rules to be made for the quarter in which the initial notice is required to be provided, and requires the disclosure to be provided within 45 days after the end of that quarter.
Which Participants Must Receive the Annual Notice?
It is important to keep in mind that the term "participant" is broadly defined to include those persons who have an account balance under the plan as well as those who are eligible but not currently participating (such as employees who have not enrolled or those who have opted out of a plan with auto-enrollment). As a result, plan administrators should confirm that their communication processes will be sufficient to delivery the notice to all of these persons,
Additional Guidance
The DOL has also announced that more rules are on the way.
We will be providing more discussion on the issues covered in this WorkCite as the compliance dates draw near.
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.