May 1, 2012

New Disclosure Obligations for Sponsors of ERISA Plans and Service Providers with ERISA Clients


Significant attention continues to be focused on the compensation paid to entities that provide investment management, recordkeeping and other services to plans subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).  Often these service providers offer their products to such plans (“Plans”) under bundled arrangements – where a variety of services are provided, sometimes by multiple entities – and those service providers may be compensated directly by the Plan or indirectly through revenue sharing or other arrangements that involve payments from sources other than the Plan (e.g., the investment vehicles in which the Plan invests).  In the view of the Department of Labor (the “DOL”), greater fee transparency is needed to enable the responsible fiduciaries of Plans (“Plan Fiduciaries”) to understand the relevant compensation arrangements better in connection with their selection and monitoring of service providers (including service providers managing the assets of a Plan or an entity deemed to hold “plan assets”) and to identify potential service provider conflicts of interest.

The DOL has taken two significant steps toward increasing fee transparency in this area by finalizing:  (i) a regulation concerning an ERISA prohibited transaction exemption applicable to the provision of services to a Plan, and (ii) a regulation requiring additional disclosure of fees and investment performance to participants in participantdirected 401(k) and other participant–directed defined contribution plans.

The service provider regulation described below under “Final Regulation Relating to Service Provider Compensation Disclosure” becomes effective July 1, 2012 and the participant–directed plan compensation disclosure regulations described below under “Final Regulation on Disclosure Requirements for Participant–Directed ERISA Plans” require action no later than August 30, 2012.  These regulations require Plan Fiduciaries and certain Plan service providers (particularly, platform providers to participant–directed 401(k) plans, as well as ERISA fiduciaries, including investment managers managing “plan assets vehicles”) to take immediate actions to comply.  Plan sponsors and Plan Fiduciaries will also need to develop and implement their own policies and procedures to monitor compliance by service providers and satisfy their own disclosure obligations under these regulations.  These regulations are detailed and complicated, and this Financial Services Alert provides only a general overview that highlights the key provisions.

Final Regulation Relating to Service Provider Compensation Disclosures

The expanded disclosure requirements set forth in the DOL’s final regulation under Section 408(b)(2) of ERISA are applicable to the provision of services to Plans (including defined benefit pension plans and defined contribution retirement plans (e.g., 401(k) plans), but not including individual retirement accounts, certain types of “SIMPLE” plans and accounts and certain frozen Section 403(b) annuity contracts or custodial accounts).  These aspects of the final regulation also do not apply to welfare plans.  Section 408(b)(2) of ERISA generally provides an exemption from ERISA’s prohibited transaction rules for reasonable arrangements with service providers as long as no more than reasonable compensation is paid by the Plan.  The new disclosure obligations described below are in addition to the existing requirements applicable to all service providers under Section 408(b)(2) of ERISA, including the requirements that a service provider’s arrangement be reasonable and that the Plan’s arrangement with the service provider be terminable on reasonably short notice without penalty to the Plan. 

Effective July 1, 2012, the regulation will also require certain Plan service providers to disclose to Plan Fiduciaries detailed information regarding fees and compensation in order to qualify for this exemption.  For existing contracts and arrangements covered by the regulation, such disclosures must be delivered prior to July 1, 2012.

Covered Service Providers

The regulation’s disclosure obligations apply to the following types of service providers, (which we refer to in this article as “Covered Service Providers”) if it is reasonably expected that such service provider (including its affiliates and subcontractors) will receive $1,000 or more in direct or indirect compensation in connection with its services, contract or arrangement:

  • ERISA Fiduciaries and Registered Investment Advisers.  Persons or entities who either (A) provide ERISA fiduciary services to the Plan itself or to an investment fund that is a “plan assets vehicle” under DOL rules in which a Plan holds a direct equity interest or (B) provide services directly to the Plan as an investment adviser registered under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), or under applicable state law;
  • Recordkeepers and Brokers that are “Platform Providers.”  Providers of recordkeeping or securities brokerage services to a self-directed individual account plan (e.g., most 401(k) plans) that make available in connection with such services (e.g., through a platform) any investment alternative (other than brokerage windows, self-directed brokerage accounts or similar arrangements) designated by the responsible plan fiduciary (each, a “Designated Investment Alternative”); and
  • Certain Service Providers Receiving Indirect Compensation.  Service providers (or their subsidiaries and independent contractors) who reasonably expect to receive indirect compensation (i.e., compensation received from any source other than directly from the Plan, plan sponsor, the service provider or its affiliate or a subcontractor) or certain related-party compensation, in either case, for providing to the Plan accounting, actuarial, appraisal, auditing, banking, custodial, insurance, investment advisory (plan or participant), legal, recordkeeping, securities brokerage, third-party administration, valuation services and/or certain types of consulting services.

Notably, the regulation does not apply to service providers who provide only non‑fiduciary services to an investment fund (as contrasted to the Plan directly) that holds plan assets (e.g., a bank collective fund).

Required Disclosures

The regulation will require Covered Service Providers to provide certain initial and ongoing disclosures in writing to Plan Fiduciaries regarding their compensation arrangements.  In addition, some service providers, particularly investment managers and registered investment advisers, may have agreed contractually to treat non-ERISA plan clients as Plans subject to ERISA.  Such contractual obligations may require disclosure to such non‑ERISA plan clients, even though disclosure is not required by the regulation. 

The regulation does not provide for any specific format for these disclosures; however, the DOL has included in the regulation (and has recommended the use of) a summary guide to indicate where information can be found within the relevant documents and agreements. 

 The initial disclosures must be provided in writing reasonably in advance of the date the service contract is entered into, extended or renewed; however, as explained above, for existing contracts and arrangements, the initial disclosures must be delivered prior to July 1, 2012.  The initial disclosures include the following:

  • Covered Services.  A description of all services to be provided pursuant to the contract or arrangement (the “Covered Services”).
  • Statement of Fiduciary or Registered Investment Adviser Status.  A statement, if applicable, that the Covered Service Provider or any affiliate or subcontractor reasonably expects to provide the Covered Services as a fiduciary under ERISA and/or as an investment adviser registered under the Advisers Act (or applicable state law).
  • Direct Compensation.  A description of all direct compensation (i.e., compensation received from the Plan) that the Covered Service Provider, an affiliate or subcontractor reasonably expects to receive in connection with the Covered Services.
  • Indirect Compensation.  A description of all indirect compensation (i.e., all compensation received from any source other than the Plan, plan sponsor, the Covered Service Provider or an affiliate or a subcontractor of the Covered Service Provider) that the Covered Service Provider, an affiliate or a subcontractor reasonably expects to receive in connection with the Covered Services, including:

    • identification of the services provided for such indirect compensation;
    • identification of the payer of such indirect compensation; and
    • a description of the arrangement between the Covered Service Provider and the payer of the indirect compensation.
  • Related-Party Compensation. A description of any compensation for the Covered Services that will be paid among the Covered Service Provider, an affiliate or a subcontractor if it is set on a transaction basis (e.g., commissions, soft dollars or incentive compensation) or is charged directly against the Plan’s investment and reflected in the investment’s net value (e.g., 12b-1 fees), including identification of the services provided for, and the payer and payee of, such compensation, even if such compensation is otherwise disclosed.
  • Termination Fees.  A description of any fees or other compensation that the Covered Service Provider, an affiliate or subcontractor reasonably expects to receive in connection with the termination of the arrangement, including how any prepaid amounts will be calculated and refunded.
  • Method of Payment of Compensation.  A description of how each type of compensation will be received (e.g., billed to the Plan or deducted from the Plan’s account).

Under the regulation, “compensation” is broadly defined to include money or any other thing of value.  Where the Covered Service Provider is not able to describe the compensation or fees in a specific monetary amount, it may provide a formula, percentage of Plan assets, per-capita charge or some other reasonable method, provided such disclosure permits a reasonable Plan Fiduciary to evaluate the reasonableness of the compensation or fees.

Special Disclosure Requirements

There are additional specific disclosure requirements for certain types of Covered Service Providers, as follows:

  • Recordkeeping Services:  If it is reasonably expected that there will be no explicit compensation for recordkeeping services or that compensation for such services will be offset or rebated based on other compensation, a reasonable good faith estimate must be provided of the implicit cost of such services to the Plan, including a detailed explanation of the services and a description of how the compensation will be received.
  • Fiduciary Services:  If a Covered Service Provider is a fiduciary to an investment contract, product or entity that holds plan assets and in which a Plan has a direct equity investment, a description of any compensation that will be charged directly against the amount invested in connection with the acquisition, sale, transfer of or withdrawal from the contract, product or entity (e.g., sales loads and redemption fees), the annual operating expenses (e.g., expense ratio) of the contract product or entity and any on-going expenses in addition to annual operating expenses (e.g., wrap fees) must be provided, unless such amounts are otherwise disclosed by the platform provider.  If the investment contract, product or entity is a Designated Investment Alternative, the Covered Service Provider must also provide additional information or data within the control of, or reasonably available to, the Covered Service Provider that is required for the plan administrator to comply with its disclosure obligations discussed below under “Final Regulation on Disclosure Requirements for Participant–Directed ERISA Plans.”
  • Investment Disclosure for Designated Investment Alternatives:  If recordkeeping or brokerage services are provided to a self-directed individual account plan and certain Designated Investment Alternatives are made available (e.g., through a platform) in connection with such services, the fee disclosures detailed above regarding fiduciary services must be provided by the platform provider for each such Designated Investment Alternative, which requirement can be met by passing through current disclosures of the issuer if certain conditions are satisfied.  This disclosure must comply with the plan administrator’s investment-related disclosure requirements to participants, as discussed below under “Final Regulation on Disclosure Requirements for Participant–Directed ERISA Plans.”

Updating Disclosures

The Covered Service Provider must disclose changes in the required disclosures as soon as practicable, but not later than 60 days after acquiring knowledge of such material change and must respond to requests for certain information from Plan Fiduciaries.  Changes to investment-related information with respect to Designated Investment Alternatives may be updated on an annual basis.

If an entity that does not hold “plan assets” at the time the contract or arrangement is entered into is later determined to hold plan assets, and a Plan holds a direct equity interest in the entity, a Covered Service Provider that provides fiduciary services to the entity must also provide the relevant initial disclosures and applicable special disclosures not later than 30 days from the date the Covered Service Provider knows that the entity holds plan assets.

Comparison to Form 5500 Schedule C

The regulation is similar in many respects to the guidance promulgated with respect to the service provider fee disclosure requirements of Schedule C to the Form 5500. Disclosure under Schedule C and Section 408(b)(2) should generally be consistent, but there are certain differences.  For example, compensation received by service providers to an investment fund (other than a VCOC or REOC) in excess of $5,000 in the plan year is required to be disclosed on Schedule C, while the regulation generally exempts non-fiduciary service providers to such investment funds from the disclosure requirements of the regulation. 

Consequences of Non-Compliance

To the extent the Plan and Covered Service Provider rely on the exemption from ERISA’s prohibited transaction rules provided by Section 408(b)(2), failure to comply with the regulation’s disclosure requirements would cause the arrangement to be a non-exempt prohibited transaction, subjecting the Plan Fiduciary to potential fiduciary liability (unless the prohibited transaction exemption discussed below is available) and the Covered Service Provider to potential excise taxes under Section 4975 of the Code.

Prohibited Transaction Exemption

In conjunction with the issuance of the final regulation under Section 408(b)(2), the DOL issued a prohibited transaction class exemption applicable to Plan Fiduciaries for situations where, unbeknownst to the Plan Fiduciary, the service provider fails to provide the disclosure required by the regulation.  In order for the relief under the class exemption to be available, the Plan Fiduciary must have reasonably believed that the disclosure requirements had been satisfied and must not have known that the service provider failed to comply with the disclosure requirements.  The exemption requires that the responsible Plan Fiduciary, upon discovering the disclosure failure, request in writing that the Covered Service Provider provide the disclosures and, if such disclosure is not made within 90 days, notify the DOL of such failure within 30 days following the end of such 90-day period.  The Plan Fiduciary must also terminate the contract or arrangement if the requested information is relevant to future services and the information is not promptly provided after this 90-day period.  The DOL also developed a model notice that Plan Fiduciaries may use for this purpose.  Note that this exemption provides relief only for the Plan Fiduciary that selects the Covered Service Provider, not to the Covered Service Provider itself.

Final Regulation on Disclosure Requirements for Participant–Directed ERISA Plans

The final regulation under Section 404(a) of ERISA sets forth fiduciary requirements for disclosure to participants in defined contribution plans that provide for the direction of investments by participants (e.g., most so-called 401(k) plans).

For plans with calendar year plan years, the initial annual disclosures regarding plan-level and investment-level information under the regulation (summarized below) must be provided no later than August 30, 2012, and the first quarterly statement of fees and expenses (summarized below) must be provided no later than November 4, 2012 (reflecting fees and expenses deducted from the participant’s account during the quarter ending September 30, 2012). 

Scope of the Participant Disclosure Regulation

The regulation generally applies to all participant–directed defined contribution plans subject to ERISA’s fiduciary rules (except for certain plans that involve individual retirement accounts).  The regulation requires that specific disclosures relating to a plan and its Designated Investment Alternatives be made to each participant or beneficiary who has the right to direct the investment of assets held in, or contributed to, his or her individual account under the plan.

The regulation imposes these disclosure obligations on the plan administrator (which, under ERISA, is generally the plan sponsor or a person or committee named as the plan administrator in the plan document).  However, the plan administrator is not liable for the completeness or accuracy of information provided by plan service providers or issuers of Designated Investment Alternatives, so long as the plan administrator relies on such information reasonably and in good faith.  As a practical matter, it is likely that plan administrators will look to service providers (such as platform providers) and issuers of Designated Investment Alternatives for the required information, and as explained above, under the final 408(b)(2) regulation, such Covered Service Providers are required to provide information necessary for plan administrators to comply with these requirements.

Plan-Related Disclosures

The regulation requires that the general plan information, the plan administrative expense information and the individual participant expense information described below be provided on or before the date on which a participant or beneficiary can first direct his or her investments (the “Initial Investment Date”) and at least annually thereafter.  If there is a change to this information, the plan generally must furnish each participant and beneficiary a description of such change at least 30 days, but not more than 90 days, in advance of the effective date of such change.  In addition, as indicated below, certain information must be provided at least quarterly.

General Plan Information.  The required general information regarding the plan, which may be disclosed through the plan’s summary plan description (“SPD”), includes:

  • An identification of any Designated Investment Alternative offered under the plan;
  • An explanation of the circumstances under which participants and beneficiaries may give investment instructions;
  • An explanation of any specified limitations on such instructions under the terms of the plan, including any restrictions on transfer to or from a Designated Investment Alternative;
  • A description of or reference to plan provisions relating to the exercise of voting, tender and similar rights appurtenant to an investment in a Designated Investment Alternative as well as any restrictions on such rights;
  • An identification of any designated investment managers; and
  • A description of any brokerage windows, self-directed brokerage accounts or similar plan arrangements that enable participants and beneficiaries to select investments beyond those designated by the plan.

Administrative Expense Information.  This information includes explanation of any fees and expenses for general plan administrative services (e.g., legal, accounting, recordkeeping) that may be charged against the individual accounts of participants and beneficiaries and that are not reflected in the total annual operating expenses of any Designated Investment Alternative, and the basis on which such charges will be allocated to each individual account.

In addition, the plan administrator must disclose the following information at least quarterly:

  • The dollar amount of the fees and expenses described above that are actually charged during the preceding quarter to the participant’s or beneficiary’s account for such services;
  • A description of the services to which the charges relate (e.g., plan administration, including recordkeeping, legal, accounting services); and
  • If applicable, an explanation that, in addition to the fees and expenses disclosed, some of the plan’s administrative expenses for the preceding quarter were paid from the total annual operating expenses of one or more of the plan’s Designated Investment Alternatives (e.g., through revenue sharing arrangements, Rule 12b-1 fees or sub‑transfer agent fees).

Individual Expense Information.  This information includes an explanation of any fees and expenses (1) that may be charged against the individual account of a participant or beneficiary on an individual, rather than on a plan-wide, basis (e.g., fees related to processing plan loans or qualified domestic relations orders, fees for investment advice, fees for brokerage windows, commissions, redemption fees and optional rider charges in annuity contracts) and (2) that are not reflected in the total annual operating expenses of any Designated Investment Alternative.

In addition, plan administrators must disclose, at least quarterly:  (1) the dollar amount of the individual fees and expenses that are actually charged during the preceding quarter to the participant’s or beneficiary’s account and (2) a description of the services to which the charges relate (e.g., loan processing fee).

Investment-Related Disclosures

The regulation requires plan administrators to disclose the following information before the Initial Investment Date, and at least annually thereafter:

  • With respect to each Designated Investment Alternative offered under the plan:  (i) the name of each Designated Investment Alternative and (ii) the type or category of the investment (e.g., money market fund, balanced fund (stocks and bonds), large-cap stock fund, employer stock fund, employer stock fund or employer securities);
  • Performance data including (i) the average annual total return of the investment alternative for one-, five-, and ten-calendar year periods (or for the life of the investment alternative, if shorter) ending on the date of the most recently completed calendar year or (ii) the fixed or stated annual rate of return and term of an investment alternative;
  • The name of an appropriate broad-based securities market index for each investment alternative and its returns over the same periods for which the investment alternative’s performance is shown;
  • The amount and a description of each shareholder-type fee and a description of any restriction or limitation that may be applicable to a purchase, transfer or withdrawal of the investment in whole or in part (such as round trip, equity wash or other restrictions);
  • The total annual operating expenses of the investment expressed as a percentage (i.e., expense ratio);
  • The total annual operating expenses of the investment for a one-year period expressed as a dollar amount for a $1,000 investment;
  • A statement indicating that fees and expenses are only one of several factors that participants and beneficiaries should consider when making investment decisions and that cumulative effect of fees and expenses can substantially reduce the growth of a participant’s or beneficiary’s retirement account in whole or in part; and
  • An internet website address for each Designated Investment Alternative where participants can find the following information with regard to the alternative:  name; objectives or goals; principal strategies (including a general description of the types of assets held by the investment) and principal risks; portfolio turnover rate; performance data; and fee and expense information.

The regulation requires that the performance and other information required to be disclosed be presented in a chart or similar comparative format.  The regulation includes a model safe harbor comparative chart with the required categories of investment-related disclosures that can be used to satisfy this formal requirement. 

In addition, the regulation requires the plan administrator to provide participants and beneficiaries with information received by the plan relating to the exercise of voting and similar rights relating to a Designated Investment Alternative in which the participant or beneficiary is invested (to the extent such rights are passed through to participants and beneficiaries). 

Finally, the plan administrator must provide certain information upon request by a participant or beneficiary (e.g., prospectuses, financial reports, or similar documents) relating to Designated Investment Alternatives that have been provided to the plan; a statement of the unit value of a Designated Investment Alternative (as well as the date of valuation); and a list of assets comprising the portfolio of each Designated Investment Alternative that is considered to hold “plan assets” under the applicable DOL regulation.

Changes to ERISA Section 404(c) Regulation

When the DOL finalized the participant disclosure regulation, it also amended its regulation under Section 404(c) of ERISA.  Under Section 404(c), if certain conditions are satisfied with respect to an individual account plan with investments directed by participants (or beneficiaries), fiduciaries will not be held liable under ERISA for the results of the participant’s (or beneficiary’s) exercise of control over his or her account.  One of the conditions to the relief under Section 404(c) is that the participant (or beneficiary) be provided with the information specified in the DOL regulation under Section 404(c).  The amendment to the Section 404(c) regulation provides that the required information under that section includes the information that is required to be provided under the Section 404(a) regulation, described above.

The amendment also incorporates into the Section 404(c) regulation a statement that Section 404(c) does not serve to relieve a fiduciary from his or her duty to prudently select and monitor any service provider or Designated Investment Alternative under the plan.  While the DOL had previously (e.g., in litigation) taken the position described in this statement, this position was not previously set forth in the Section 404(c) regulation.


The service provider disclosure regulation and the participant disclosure regulation described above reflect an increased focus by the DOL on compensation arrangements affecting Plans.  These developments will require financial services organizations to review the products they offer to Plans, and the related compensation structures, to determine what changes are necessary or appropriate in light of the emerging legal standards in this area.

More immediately, Plan administrators and Covered Service Providers (or entities that may become Covered Service Providers) should establish and implement a plan for compliance with these new regulations in order to meet the rapidly approaching deadlines.