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Key Takeaways from Plan Service Provider Fee Disclosure Final Regulations

Employee Benefits Law Alert Marla B. Anderson, David P. Olson, Robert D. Rothacker

On February 2, 2012, the Employee Benefits Security Administration ("EBSA") issued final regulations under Section 408(b)(2) of ERISA. The final regulations, which require benefit plan service providers to provide benefit plan fiduciaries with information regarding the fees that they receive, do not differ significantly from the interim final regulations that EBSA issued in 2010. The final regulations do, however, delay the covered service provider fee disclosure compliance deadline by three months (and thus also delay the participant-level fee disclosure compliance deadlines), contain some relief from certain requirements and impose some additional requirements.


In general, ERISA prohibits transactions between plans and any "party in interest," which is broadly defined to include anyone providing services to an ERISA plan. Section 408(b)(2) of ERISA provides a prohibited transaction exemption for reasonable service contracts between an employee benefit plan and a plan service provider if the contract meets certain requirements set forth by the Department of Labor. One of these requirements is that "covered service providers" ("CSPs") must provide responsible fiduciaries of most ERISA-covered retirement plans with disclosures regarding the direct and indirect compensation received by the CSPs for services provided to covered plans.

This Alert will focus on how these final regulations affect plan fiduciaries and on the differences between the interim final regulations from 2010 and the new final regulations. For more information on the content of the interim final regulations (much of which EBSA carried over to the final regulations), see the August 2010 issue of Quarles & Brady's For Your Benefits:

Why Plan Fiduciaries Should Pay Attention to These Fee Disclosure Requirements. Plan fiduciaries, such as plan committee members or employees or officers who are responsible for benefit plan investments, reporting and administration, need to be familiar with these fee disclosure rules for several reasons. First, if a CSP fails to comply with the rules, EBSA could assess penalties against the plan fiduciary on the grounds that the service contract under which a CSP provides services to an ERISA plan is not "reasonable" and thus, that the plan has engaged in a prohibited transaction. Second, contracts between plans and CSPs may need to be updated to reflect these new requirements. Third, in this era of increasing ERISA investment fee litigation, plan fiduciaries must carefully review all CSP disclosures to determine whether the CSP's compensation is reasonable and whether the CSP might be subject to any inappropriate financial conflicts of interest. Finally, those fiduciaries who have struggled to complete the fee information required to be reporting on Schedule C of Form 5500 since 2009 should find it easier to get this information from CSPs once the new fee disclosure requirements take effect.

If you are a plan fiduciary and are interested in hearing more about how these fee disclosure requirements, along with the new requirements that fiduciaries disclose certain fee information to plan participants on a regular basis, affect you, you can learn more at Quarles & Brady's upcoming Fiduciary University, which will be held live in Milwaukee and broadcast to our offices in Madison and Phoenix on April 24, 2012, and live in Chicago on April 26, 2012. More details on Fiduciary University will be coming soon.

What's New in the Final Regulations?

3-Month Delay in Compliance Deadlines

  • The effective date of the final regulations is July 1, 2012. This means that contracts or arrangements between a CSP and a covered plan that are entered into on or after July 1, 2012, must comply with the final regulations, and contracts or arrangements in existence prior to July 1, 2012, must be brought into compliance as of such date.
  • The disclosure deadlines for the participant-level fee disclosures is also delayed as follows:
    • Initial participant-level fee disclosures must be provided no later than August 30, 2012. This deadline had previously been May 31, 2012.
    • The first quarterly statement reflecting fees and expenses charged against participants' accounts is only required to reflect third quarter data and must be provided no later than November 14, 2012. This deadline had previously been August 14, 2012.

More Compliance Requirements

  • New Disclosure Requirement for Indirect Compensation. A CSP must now "describe the arrangement" between a payer of indirect compensation and the CSP. The description must enable the responsible plan fiduciary to analyze why the payer, generally an unrelated third party, compensates the CSP in connection with the CSP's contract with the covered plan. For example, recordkeepers most likely will be required to describe the arrangements by which they receive float from banks or other financial institutions and/or soft dollars from mutual funds and other money managers. Previously, a CSP was not required to "describe the arrangement" between a payer of indirect compensation and the CSP.
  • Broad Interpretation of "Compensation." The preamble to the final regulations emphasize that the concept of compensation received by a CSP in connection with a contract or arrangement for services should be broadly construed. The preamble contains a new example of this rule of broad construction. In this example, if a CSP sponsors a conference for its plan sponsor clients and charges them each $850, and if a financial institution subsidizes the conference with $20,000, the financial institution's $20,000 subsidy is compensation received "in connection with" the CSP's contract with the plan, apparently even where the conference is not specifically described in the contract. Thus, the financial institution's subsidy is indirect "compensation" that must be disclosed.
  • Clarifications of Scope of "Direct Compensation." The preamble to the final regulations clarify that direct compensation includes compensation that is initially paid by the plan sponsor, which is then reimbursed by the plan and also compensation that is paid directly from participants' and beneficiaries' accounts (this presumably would include forfeitures used to pay plan administration expenses).
  • Consistency With Participant-Level Fee Disclosures. A CSP must calculate and disclose annual operating expenses of designated investment alternatives generally in accordance with the rules for participant-level fee disclosures. This requirement ideally will result in consistent disclosures regarding expense information for designated investment alternatives. Previously, CSPs were not required to calculate and disclose this information generally in accordance with the rules for participant-level fee disclosures. Also, CSPs must also disclose any information or data about designated investment alternatives within its control - or reasonably available to it - that is required to be provided to participants pursuant to the participant-level fee disclosure rules. Previously, a CSP was not specifically required to disclose this information or data.
  • Termination of CSP May Be Required If CSP Fails to Promptly Disclose. If a CSP fails to provide information relating to future services that has been requested by the plan fiduciary, the plan fiduciary must terminate the service contract as quickly as possible, consistent with the fiduciary duty of prudence. Previously, a CSP was not specifically required to terminate the service contract in these circumstances.

Additional Relief Available

  • Identification of Payer Where Payer's Identity is Unknown in Advance. In some situations, a CSP may not be able to identify in advance the identity of a payer of indirect compensation. For example, a broker-dealer may not be able to identify the payer of compensation in advance of service arrangements involving securities purchased through brokerage windows, self-directed brokerage accounts or similar arrangements. According to the preamble to the regulations, in these situations the CSP may describe the indirect compensation in general terms, provided that the description contains information that is sufficient to permit a responsible plan fiduciary to evaluate the reasonableness of such compensation in advance of the service arrangement.
  • Certain Frozen 403(b) Plans Excluded From 408(b)(2) Rules. The final regulations contain a new exclusion from the 408(b)(2) rules for certain frozen 403(b) plans. A CSP is not required to provide fee disclosures to a frozen 403(b) plan if the plan meets all of the following requirements:
    • the annuity contract or custodial account was issued to a current or former employee before January 1, 2009;
    • the plan sponsor no longer has any obligation to make contributions (including employee salary reduction contributions) and in fact ceased making contributions before January 1, 2009;
    • all the rights and benefits under the annuity contract or custodial account are legally enforceable against the insurer or custodian by the individual owner of the annuity contract or custodial account without any involvement by the employer; and
    • the individual owner is fully vested in the annuity contract or custodial account.
  • Pass-Through Relief. Under the interim rule, a CSP providing recordkeeping or brokerage services could not "pass through" disclosures about designated investment alternatives unless the disclosures themselves were regulated by a state or federal agency. In response to comments that many disclosures are not regulated by a state or federal agency (e.g., by collective trusts, insurance general accounts, and guaranteed investment contracts), the "pass through" guidance was revised so that a CSP can pass through disclosure information provided by (i) a registered investment company (e.g., mutual fund); (ii) a regulated insurance company; (iii) an issuer of a publicly-traded security; or (iv) a regulated financial institution.
  • No Guide to CSP Disclosures is Required Now, But Likely Will Be Required Later. A CSP continues to be free to provide the disclosures in multiple documents. However, the Department of Labor is concerned that CSPs will provide voluminous and confusing materials to plan fiduciaries, and thus intends to require a CSP to provide plan fiduciaries with some type of guide to the disclosures. The final regulations even include a sample guide that CSPs may use on a voluntary basis.
  • Reporting Relief of Changes to Investment Disclosures. A CSP must annually report changes to investment-related disclosures (e.g., descriptions of certain investment transaction fees like redemption fees, sales charges, etc. and description of expense ratio). This is an improvement to the interim final rule which required reporting of such changes within 60 days.

For more information, contact any of the following Quarles & Brady employee benefits attorneys: Marla Anderson at (414) 277-5453 / [email protected]; Amy Ciepluch at (414) 277-5585 / [email protected]; Sarah Fowles, at (414) 277-5287 / [email protected]; Angela Marie Hubbell at (312) 715-5097 / [email protected]; Paul Jacobson at (414) 277-5631 / [email protected]; David Olson at (414) 277-5671 / [email protected]; Robert Rothacker at (414) 277-5643 / [email protected] or your Quarles & Brady attorney.

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