New Retirement Plan Fee-Disclosure Rules Now Finalized
In February 2012, the Department of Labor ("DOL") published final regulations requiring certain retirement plan service providers to furnish fee-related information to the plan administrators of the defined benefit and/or defined contribution plans with whom they contract (the "service-provider rules").[1] Service providers must comply with the final regulations as of July 1, 2012 with regard to both existing and new contracts. In turn, plan administrators must review the information provided to determine whether the contract in question is reasonable.
In conjunction with the publication of the service-provider rules, the DOL also confirmed a revised effective date for the final regulations published in October 2010 requiring plan administrators of participant-directed individual account plans such as 401(k) plans to furnish certain fee-related information to plan participants (the "participant-level rules").[2] Plan administrators of such plans now have until August 30, 2012, to furnish the initial annual fee disclosure to participants and until November 14, 2012, to furnish the initial quarterly fee statement.
Considerable commentary has accompanied the publication and approaching effective dates of the service-provider and participant-level rules. This commentary has understandably focused on the numerous and detailed new obligations the rules impose on service providers and plan administrators. In this client alert, we focus on these rules in the context of their effect on existing fiduciary responsibilities under ERISA.
I. FIDUCIARY RESPONSIBILITY UNDER ERISA
The service-provider and participant-level rules represent two distinct components of the extensive obligations ERISA imposes on plan fiduciaries. The service-provider rules concern the types of transactions in which plan fiduciaries are permitted to engage. The participant-level rules concern the standard of care with which plan fiduciaries must discharge their duties with respect to a plan and its participants.
II. THE SERVICE-PROVIDER RULES: A PROHIBITED TRANSACTION EXEMPTION
Certain transactions are prohibited under section 406 of ERISA. These include the furnishing of goods, services, or facilities between a plan and a party in interest. Because ERISA defines the term "party in interest" to include a person providing services to a plan, absent a specific exemption a contract or other arrangement between a plan and a service provider would constitute a prohibited transaction.
Section 408 of ERISA provides such an exemption. Specifically, it will not constitute a prohibited transaction for a plan fiduciary to contract or make reasonable arrangements with a party in interest for office space, or legal, accounting, or other services necessary for the establishment or operation of the plan, if no more than reasonable compensation is paid for such services. The service-provider rules place new disclosure obligations on retirement plan service providers in order to assist plan fiduciaries in determining whether a contract or arrangement is reasonable.[3]
Retirement plan service providers must now disclose, as applicable: (i) descriptions of the services to be provided pursuant to the contract or arrangement; (ii) the service provider's status as a fiduciary and/or registered investment adviser; (iii) all the compensation the service provider reasonably expects to receive in connection with the services provided, including indirect compensation, compensation among related parties, and compensation for termination of the contract or arrangement; (iv) separately, the direct and indirect compensation the service provider reasonably expects to receive in connection with certain recordkeeping services and/or an estimate of the cost of such services; (v) investment disclosures, including compensation, operating expense and other information with regard to each investment that holds plan assets and in which the plan has a direct equity investment, and for which fiduciary and/or recordkeeping and brokerage services will be provided pursuant to the contract or arrangement; and (vi) the manner of receipt of any compensation described in (iii), (iv) and (v). The service-provider rules elaborate in detail upon these requirements, including discussion of the specific categories of service providers and plans to which they apply.
Plan fiduciaries and service providers covered by the service-provider rules who wish to take advantage of the prohibited transaction exemption for reasonable contracts or arrangements must comply with the new rules as of July 1, 2012. While the burden of disclosure falls upon service providers, plan fiduciaries bear the responsibility for determining whether the contract in question is reasonable and may have to notify the DOL of a service provider's failure to provide the required disclosures. Therefore, plan fiduciaries as well as service providers may wish to consult with benefits counsel to help ensure their compliance with the service-provider rules.
III. THE PARTICIPANT-LEVEL RULES: FIDUCIARY PRUDENCE
Section 404(a) of ERISA imposes a strict standard of care on plan fiduciaries. This standard of care requires that plan fiduciaries discharge their duties with prudence and for the exclusive purpose of providing benefits to participants and their beneficiaries.
Because the investment of plan assets is a fiduciary act, the DOL takes the position that when a retirement plan permits the plan's participants and beneficiaries to exercise control over the investment of their individual plan accounts, plan fiduciaries must take steps to ensure that such participants and beneficiaries are made aware of their rights and responsibilities with respect to managing their individual plan accounts and are provided sufficient information regarding the plan, including its fees and expenses and designated investment alternatives, to make informed decisions about the management of those accounts.
The participant-level rules are intended provide a uniform basic disclosure regime for fiduciaries of all participant-directed individual account retirement plans to follow in fulfilling these responsibilities to plan participants. The rules describe in detail the types of information that must be disclosed. Both annual and quarterly disclosures must be provided. While the specific requirements depend on whether an annual or quarterly disclosure is being made, in general the information to be provided falls into two broad categories: plan-related information and investment-related information.
Plan-related information includes: (i) general information, such as identification of any designated investment alternatives and/or self-directed brokerage accounts offered under the plan, how to give investment instructions, and how to exercise any voting rights; (ii) information regarding administrative expenses, including an explanation of any fees and expenses for general plan administrative services such as legal, accounting, and recordkeeping services that may be charged against plan accounts; and (iii) information regarding individual account charges such as fees for processing loans and qualified domestic relations orders and fees for investment advice and self-directed brokerage accounts.
Investment-related information includes: (i) the name of each designated investment alternative offered under the plan and the type or category of the investment; (ii) performance data for each designated investment alternative; (iii) for designated investment alternatives for which the return is not fixed, benchmark information by which plan participants can compare the designated investment alternative's performance to the performance of an appropriate broad-based securities market index; (iv) fee and expense information, including a description and the amount of each shareholder-type fee (such as commissions, purchase and redemption fees, and other charges made directly against a participant's investment) ; (v) a website address that directs participants and beneficiaries to supplemental information regarding each designated investment alternative; and (vi) a general glossary of terms to assist in understanding the plan's designated investment alternatives, or a website address sufficiently specific to provide access to such a glossary. Additional special rules apply to specific types of investments, such as annuities and qualifying employer securities.
Compliance with these rules is mandatory. In this regard, the participant-level rules differ from the disclosures which some plan fiduciaries may already be voluntarily providing in order to take advantage of the optional protection afforded by section 404(c) of ERISA, which exempts someone who is otherwise a retirement plan fiduciary from liability for any loss resulting from a participant or beneficiary's exercise of control over the assets in her individual account under a plan. At the same time, the participant-level rules include conforming amendments to the existing rules under section 404(c) in order to avoid having different disclosure rules for plans intended to comply with section 404(c).
All fiduciaries of calendar-year individual account plans should ensure that they are prepared to issue their initial annual fee disclosure by August 30, 2012 and their initial quarterly statements by November 14, 2012. In addition, fiduciaries of plans intended to comply with section 404(c) of ERISA should review their compliance in light of the revised requirements under the participant-level rules.
Like the service-provider rules, the participant-level rules are detailed and contain many nuances and technical requirements, including rules regarding permissible forms of disclosure. Plan fiduciaries may wish to consult with benefits counsel as part of their compliance efforts.
IV. CONCLUSION
The service-provider rules and the participant-level rules form part of a larger regulatory initiative expressly undertaken by the DOL to ensure that employee benefit plan fiduciaries, as well as plan participants and beneficiaries, obtain comprehensive information about the services that are provided to employee benefit plans and the cost of those services. Compliance with these rules will require close reading of their individual requirements, the full discussion of which is beyond the scope of this client alert. Rather, this client alert is intended to provide the context for understanding these provisions within the larger framework of ERISA.
For questions or concerns about the new retirement plan fee-disclosure rules please contact:
Joanne C. Youn
Richard W. Skillman, 202-862-5034, rws@capdale.com
Patricia G. Lewis, 202-862-5-17, pgl@capdale.com
Ronald G. Cluett
[1] Available at http://webapps.dol.gov/FederalRegister/PdfDisplay.aspx?DocId=25781.
[2] Available at http://webapps.dol.gov/FederalRegister/PdfDisplay.aspx?DocId=24323.
[3] Previously, the DOL regulations addressing reasonable arrangements simply provided that no contract or arrangement is reasonable if it does not permit termination by the plan without penalty to the plan on reasonably short notice.
Caplin & Drysdale
Washington, D.C. Office: One Thomas Circle N.W., Suite 1100
Washington, D.C., USA 20005
PH: 1 202-862-5000 FX: 1 202-429-3301
New York Office: 375 Park Avenue, 35th Floor
New York, New York, USA 10152
PH: 1 212-319-7125 FX: 1 212-644-6755
www.caplindrysdale.com
© 2012 Caplin & Drysdale, Chartered
All Rights Reserved.
About Caplin & Drysdale
A leading law firm, Caplin & Drysdale provides employee benefits counseling and exempt organization counseling to companies, organizations, and individuals throughout the United States and around the world. The firm also provides general tax law counseling, corporate law counseling, political activity law counseling, white collar defense and complex civil litigation services.
This email alert is intended as a summary of legal issues for your general information. It does not provide legal advice, nor does it create an attorney-client relationship with you or any other reader. If you require legal guidance in any specific situation, you should engage a qualified lawyer for that purpose. Prior results do not guarantee a similar outcome.
