Publications

26 JUL 2010

Regulations provide guidance on required fee disclosures

US Employee Benefits Alert

The Department of Labor has released interim final regulations specifying the information concerning fees which must be disclosed by certain service providers to ERISA pension benefit plans to which they are providing services. 

The objective of these regulations is to allow plans to obtain an accurate understanding of the amount of fees they will be charged for particular services and how those fees will be determined.  The regulations’ approach is to interpret the requirement of ERISA § 408(b)(2) – that plans’ contracts with service providers must be “reasonable,” including that they can require the payment of only reasonable fees by the plans for the services – as requiring that the covered service providers must disclose this fee information to ERISA pension benefit plans.  A principal consequence of the regulations is to require detailed disclosure of “indirect” compensation paid in connection with the rendition of services to covered plans.

These final interim regulations will be effective on July 16, 2011, and will apply to existing contracts on that date as well as to new contracts entered into thereafter.

What service providers are covered by the regulations?

The four categories of service providers to pension benefit plans that are covered by the interim final regulations are:    

1.         Service providers who are fiduciaries of the plan

2.         Investment advisors registered under either the Investment Advisors Act of 1940 or any state law who provide services to the plan 

3.         Persons providing recordkeeping or brokerage services to individual account plans, as defined in ERISA, that permit participants or beneficiaries to direct the investments of their own accounts, if one or more designated investment alternatives will be made available in connection with such recordkeeping services or brokerage services

4.         Other classes of service providers, but only if they receive indirect compensation (as defined in the regulations) for their services.  These include, for instance, parties providing accounting, auditing, actuarial, appraisal, banking, consulting, custodial, insurance, legal or administrative services. 

What fee information is required to be disclosed?

 
The fee information which is required to be disclosed by the interim final regulations is:

• A description of the services to be provided by the service providers
  
• If applicable, a statement that the service provider will provide the services as a fiduciary, or, if applicable, a statement that the service provider will provide the services as an investment advisor registered under either the Investment Advisors Act of 1940 or any state law
  
• A description of all direct compensation the service provider expects to receive in connection with the services
  
• Separately, a description of all indirect compensation that the service provider expects to receive in connection with the services, including identification of the services for which the indirect compensation will be received and the name of the payer of the indirect compensation
  
• A description of any compensation that will be paid among the service provider, any affiliate or any subcontactor in connection with the services (e.g., commissions, soft dollars, finders fees or other similar incentive compensation based on business placed or retained), or that will be directly charged against the plan’s investments and reflected in the net value of the investments (e.g., Rule 12b-1 fees), including the services for which such compensation will be paid and the names of the payers and recipients of such compensation
  
• A description of any compensation the service provider, any affiliate or any subcontactor reasonably expects to receive in connection with a termination of the service contract, and how any prepaid amounts will be calculated and refunded upon such termination
  
•  A description of the manner in which the compensation will be received, such as whether the plan will be billed or the compensation will be deducted directly from the plan’s accounts or investments
  
•  With regard to compensation for recordkeeping services:
  
• a description of all direct and indirect compensation that the service provider, any affiliate or any subcontractor expects to receive in connection with the recordkeeping services, and
  
  • if the service provider expects recordkeeping services to be provided without explicit compensation, or when the compensation is offset or rebated based on other compensation received by the service provider, an affiliate or a sub-contractor, a reasonable and good faith estimate of the cost to the plan of such record keeping services
• With respect to services provided by a service provider acting as a fiduciary for an investment that holds plan assets:
  
  • a description of any compensation that will be charged directly against the amounts invested (e.g., sales loads, sales charges, redemption fees, surrender charges, exchange fees, account fees and purchase fees)
  • a description of annual operating expenses (e.g., expense ratio) if the return is not fixed, and
  • a description of any ongoing expenses in addition to annual operating expenses (e.g., wrap fees, mortality and expense fees)

To whom must the required fee information be disclosed?

The interim final regulations require the fee information to be disclosed to the “responsible plan fiduciary” of the plan.  This is defined as the plan fiduciary with the authority to cause the plan to enter into, extend or review the plan’s contract or arrangement with the service provider.

When must the disclosure occur?

The required disclosure must be made by the service provider reasonably in advance of the date a service contract is entered into, extended or renewed.

A service provider must disclose a change in the required information as soon as practicable, but not later than 60 days after the date on which the service provider is informed of the change, unless this is precluded by extraordinary circumstances beyond the service provider’s control, in which case the information must be disclosed as soon as practicable.

Information about a new plan investment alternative must be disclosed as soon as practicable, but not later than the date the investment alternative is designated by the responsible plan fiduciary.

What are the consequences of failure to comply with the regulations?

If the service provider does not comply with the disclosure requirements of the regulations, then the contract between the service provider and the plan will be a “prohibited transaction.”  As a consequence, the service provider, and the responsible plan fiduciary, potentially will be subject to severe penalties under ERISA.

However, the regulations provide an exemption for the responsible plan fiduciary, so that only the service provider will be penalized, if the responsible plan fiduciary was reasonably unaware of the service provider’s failure to comply.  In order to qualify for the exemption, the responsible plan fiduciary:

• Must have reasonably believed that the contract itself met the requirements of the disclosure regulations
• Must not have known, or had reason to know, that the service provider would fail to comply with the requirements of the regulations
• Immediately upon discovering that the service provider failed to comply its disclosure obligations, must request in writing that the service provider furnish the missing information
• If the service provider fails to do so promptly, must notify the Department of Labor of the service provider’s failure

Do these requirements preempt state law?

The regulations stipulate that they shall not be construed to supersede any provision of state law that governs disclosures by service providers covered by the regulations, except to the extent that such a law prevents the application of the requirements of the regulations.

If you have any questions about these fee disclosure requirements, please contact any of the individuals listed below.

In Chicago:

Ian S. Kopelman

Anne M. Pachciarek

In Washington, DC:

Mark Muedeking

Rita M. Patel

Julia T. Kovacs

In San Francisco:

Mark Boxer

David F. Boyle