Department of Labor Issues Final Fee Disclosure Rules
The Department of Labor (DOL) has recently issued final regulations prescribing the disclosures required to be made by most service providers to plan fiduciary responsible for hiring those providers. The final regulations take effect on July 1, 2012, and coordinate with previously issued final participant disclosure regulations that take effect on August 30, 2012 for calendar year plans. Initial quarterly participant disclosures for calendar year plans must be made by November 14, 2012.
In general, the final regulations require any service provider to an ERISA-covered plan expecting to receive more than $1,000 over the life of their contract disclose the services they will provide, the compensation, both direct and indirect they will receive, and whether they will be providing services as a plan fiduciary. In addition, record-keepers and/or brokers providing a platform of investments to a participant–directed plan must provide fee and expense information with respect to those investments. Failure to comply with these rules constitutes a prohibited transaction that may result in liability for the service provider as well as the plan fiduciary.
These rules were discussed in further detail in prior newsletters and in a BCG Whitepaper published on our website. We will discuss the significant changes in the final regulations from the “interim final” regulations issued in July 2010.
Coordination with participant disclosures
This information disclosed to plan fiduciaries will assist them in fulfilling their duties to assess the reasonableness of service-provider compensation and identify potential conflicts of interest.
The final regulations also update the disclosure requirements for service providers to better track the information that plan administrators need to comply with the participant fee disclosure requirements. A plan service provider must now disclose to plan fiduciaries the total annual operating expense of each designated investment alternative, expressed as a percentage. In addition, the service provider must disclose any other investment-related information that must be disclosed to participants on the comparative chart of investment options if such information is within the control of, or reasonably available to, the service provider.
Changes in Disclosed Information
Any changes to the required disclosures must be generally disclosed by the service provider to the plan within 60 days. The final regulations permit changes to investment-related information to be disclosed only annually.
Exemption for “frozen” 403(b) accounts
403(b) accounts that are exempt from the IRS Form 5500 annual reporting requirements are also exempt from the service provider fee disclosure requirement. These are accounts or contracts that meet all of the following requirements:
- The contract or account was issued before Jan. 1, 2009.
- The employer has not had an obligation to make contributions, nor has it made any contributions, to the contract or account on or after Jan. 1, 2009.
- The rights and benefits of the contract or account are legally enforceable against the insurer or custodian by the participant without any involvement by the employer.
- The participant is fully vested in the contract or account.