Alert March 18, 2014

DOL Issues Proposed Rule Requiring Guide for 408(b)(2) Disclosures

On March 11, the Department of Labor (the “DOL”) issued a proposed rule (the “Proposed Rule”) which would require employee benefit plan “covered service providers” (as defined in the 408(b)(2) disclosure regulation of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”)) to provide a “guide” to augment the disclosures currently required by that regulation if such disclosures are provided in multiple or lengthy documents.  The DOL subsequently released a fact sheet describing the Proposed Rule as well as an information collection request regarding the effectiveness of the existing disclosure requirements under Section 408(b)(2).  Section 408(b)(2) provides a prohibited transaction exemption for the provision of services and requires that the services be provided pursuant to the reasonable arrangement and for not more than reasonable consideration payable from the plan.

As discussed in the May 1, 2012 Financial Services Alert, under Section 408(b)(2) of ERISA and the final regulation issued thereunder (the “Regulation”), “covered service providers” must provide certain specific disclosures (the “Disclosures”) to the responsible plan fiduciary detailing fees charged to or paid by plans in order for service arrangements to be considered “reasonable” under Section 408(b)(2) of ERISA.  The Regulation was intended to ensure that plan fiduciaries would be provided the information needed to assess (a) the reasonableness of the compensation to be paid for plan services, and (b) potential conflicts of interest that could affect the performance of those services.  The DOL did not require such Disclosures to be provided in any particular format, and permitted service providers to utilize different documents from different sources as long as all of the documents collectively contained the required information.  In releasing the Proposed Rule, the DOL noted that some plan fiduciaries need an additional tool to make effective use of such Disclosures if they are provided in multiple or lengthy documents.

The Proposed Rule would require covered service providers to provide a guide along with the Disclosures required by the Regulation, if such Disclosures are contained in multiple documents, or in a document in excess of a specified number of pages.  The DOL reserved for comment the number of pages which would necessitate the provision of a guide.  The Proposed Rule would not require covered service providers to provide a guide if all of the Disclosures are provided in a single concise document.

If required, the proposed guide must specifically identify the document and page, or “other sufficiently specific” locator such as section identification, that would enable the responsible plan fiduciary to quickly locate the following information, if applicable to the contractual arrangement: (a) the description of services to be provided to the plan, (b) a statement concerning any services to be provided as a fiduciary, (c) a description of all direct compensation, (d) a description of all indirect compensation, (e) a description of any compensation that will be paid among related parties, (f) a description of any compensation for termination of the arrangement, (g) a description of all compensation for recordkeeping services, and (h) certain financial product fees and expenses associated with plan asset vehicles.  The guide must also identify a person or office, including contact information, that a plan fiduciary may contact regarding the Disclosures.  Although the DOL did not include a model guide with the Proposed Rule, it previously released a sample guide with the Regulation which may be helpful.

The DOL has requested comments on (1) the standard to determine when a guide would be required (including whether a page number standard is the correct standard and what number of pages would be appropriate), (2) the structure of the guide and whether its requirements would be reasonable and cost effective, (3) any alternative tools that would assist plan fiduciaries in reviewing the Disclosures, and (4) whether an amendment of the Regulation should instead require a summary of “key” disclosures.  The DOL is accepting comments through May 12, 2014.

The DOL also announced its intention to conduct approximately eight to ten focus group sessions with approximately 70 to 100 fiduciaries of small pension plans (less than 100 participants) to explore current practices and the likely effects of the Proposed Rule.

The Proposed Rule would be effective 12 months after publication in final form in the Federal Register; it is not clear whether the Proposed Rule would apply to all service arrangements, including existing arrangements, or only to those entered into, or perhaps modified, after the effective date.