Alert February 14, 2012

DOL Issues Final Regulation Regarding Service Provider Fee Disclosure

The Department of Labor (“DOL”) issued a final regulation (the “Final Regulation”) under Section 408(b)(2) of the Employee Retirement Income Security Act of 1974, as amended.  The Regulation will require persons providing certain services to most ERISA-covered pension plans (including 401(k) plans and defined benefit pension plans) to disclose to plan fiduciaries detailed information regarding fees and compensation.

For the most part, the Final Regulation carries forward the provisions of the DOL’s interim final regulation under Section 408(b)(2), which was described in the August 3, 2010 Financial Services Alert.  Significant differences between the Final Regulation and the interim final regulation include the following:

  • The Final Regulation does not apply to persons providing services to certain plans funded with Internal Revenue Code Section 403(b) annuity contracts or custodial accounts that satisfy certain conditions (e.g., among other things, they must have been issued prior to 2009, and the sponsoring employer has stopped making contributions).
  • Under the Final Regulation, a covered service provider must provide more information concerning its receipt of “indirect compensation.” including a description of the arrangement between the service provider and the payer of the indirect compensation.
  • The investment-related information that must be provided with respect to designated investment alternatives available under a plan that permit participants to direct investments is conformed to the disclosure requirements relating to designated investment alternatives under the DOL’s regulation concerning disclosures to participants (the “Participant-Level Fee Disclosure Regulation”), which is described in the November 2, 2010 Financial Services Alert.

The Final Regulation is effective July 1, 2012, with regard to both existing and new covered service arrangements.  As a result, all covered service providers will be required to satisfy the Final Regulation’s disclosure obligations with respect to all existing ERISA clients that are covered plans by that date in order to continue to rely on the prohibited transaction exemption provided by Section 408(b)(2).  The effective date of the Participant-Level Fee Disclosure Regulation is tied to the Final Regulation’s effective date.  See the July 19, 2011 Financial Services Alert.  For plans with calendar year plan years, the initial annual disclosures regarding plan-level and investment-level information under the Participant-Level Fee Disclosure Regulation must be provided no later than August 30, 2012, and the first quarterly statement of fees and expenses must be provided no later than November 14, 2012 (reflecting fees and expenses deducted from the participant’s account during the quarter ending September 30, 2012).  A more detailed summary of the Final Regulation and the Participant-Level Fee Disclosure Regulation will be forthcoming.