On February 2, 2012, the Department of Labor (DOL) published the final Service Provider Disclosure under Employee Retirement Income Security Act of 1974 (ERISA) section 408(b)(2). The regulation requires these service providers to disclose to the plan sponsor fiduciary information about: (1) the services to be performed; and (2) the fees and compensation to be received. The intent of the regulation is to make it easier for plan fiduciaries to assess the reasonableness of the fees paid to service providers and to highlight potential conflicts of interest that could affect the service provider's delivery of services and performance.
Here are some key features of the new rules:
Plans subject to disclosure requirement: The regulation applies only to retirement plans, both defined contribution (DC) and defined benefit (DB), covered by ERISA. Plans that do not have any common law employees, or owner-only plans are excluded from the regulations. IRAs, SEPs and SIMPLE IRAs are specifically excluded. Welfare plans are also excluded, but may be considered at a later date.
Disclosure requirement: Certain service providers, such as Fidelity, must disclose the services being performed and the direct or indirect compensation that is being received. This would include compensation such as consulting fees, brokerage fees, transfer fees, and 12b-1 fees. Compensation also includes compensation received by an affiliate or subcontractor of the provider. Where there is no explicit fee, the service provider must provide a reasonable and good faith estimate of the cost to the plan for the services being provided.
How the information will be disclosed: The compensation can be expressed as a dollar amount, a formula, a percentage of plan assets, or as a per participant charge. The regulation does not require that the disclosure be made part of the vendor contract; it does, however, mandate that the disclosure, in the case of a new client, be made prior to the execution of a service provider arrangement. The regulation does not specifically address the electronic delivery of the information.
Additional requirement for DC recordkeepers: In addition to information about its own compensation, a recordkeeper of a participant-directed DC plan must disclose, for all designated investment options on its platform, the expense ratio and annual operating expenses of the fund or product. Self-directed brokerage windows are excluded from this requirement, but the broker must still disclose compensation received in connection with self-directed brokerage investments. The recordkeeper may forward the prospectuses of unaffiliated mutual funds to satisfy the disclosure requirement for such funds.
Changes to disclosure: The service provider is also charged with disclosing a change to the initial disclosure no later than 60 days from the date the provider is informed of the change.
Failure to comply: If a service provider fails to comply, the service provider would be subject to an excise tax penalty. Importantly, the rule provides relief to a plan sponsor who unknowingly enters into a service contract with a provider that has not satisfied the disclosure. Service providers are also permitted to fix errors or omissions made in good faith.
New and existing clients: The service provider will have to comply with the regulation for all clients no later than July 1, 2012, and provide existing clients with updated disclosure on or before that date.