Final Service Provider Disclosure Rules Are Issued
The Department of Labor (DOL) has issued final regulations specifying required service provider fee disclosures to retirement plan fiduciaries. The purpose of the rules is to assist plan fiduciaries in determining the reasonableness of compensation paid to covered service providers and any conflict of interest that might affect a provider’s performance under a contract with the fiduciaries. The DOL’s regulations seek to help plan fiduciaries make better decisions when selecting and monitoring service providers.
These regulations are coupled with other rules regarding disclosures by plan sponsors to eligible employees and plan participants. Those rules require disclosure of plan-related administrative expense and fee information and investment-related information, much of which will be provided to plan sponsors by service providers as a result of the service provider fee disclosure regulations.
Following are highlights of the final regulations.
Covered service provider defined
The rules define a Covered Service Provider (CSP) as a service provider that enters into a contract with a covered plan and reasonably expects to receive at least $1,000 in compensation for its services. Services could include certain fiduciary or registered investment advisor services or providing investment options to the plan in connection with brokerage or recordkeeping services.
Compensation to be disclosed
CSPs must disclose all direct and indirect compensation expected to be received by the CSP, its affiliates and any subcontractors.
Direct compensation is that which is received directly from the covered plan. Indirect compensation is compensation received from any source other than the plan. The final rule requires a description of the arrangement between the payer and the CSP receiving indirect compensation, so that the plan fiduciary can understand why the payer is compensating the CSP in connection with services to the plan.
According to the final rules, descriptions of compensation or cost may be expressed as dollar amounts, formulas, percentages of plan assets, per-participant charges or other reasonable method. They also now permit good faith estimates, as long as they include the methodology and assumptions used.
Operating expenses must be described
The final regulations require disclosure of the total annual operating expenses, expressed as a percentage, of a “designated investment alternative,” such as a mutual fund. This is designed to help the plan fiduciary disclose investment-related information to participants under the participant-level fee disclosure rules.
Source of investment-related data required
The CSP may simply provide the designated investment alternative information furnished by the issuer. The final rule requires that the issuer be:
a registered investment company (such as a mutual fund),
an insurance company qualified to do business in a state,
an issuer of a publicly-traded security, or
a financial institution supervised by a federal or state agency.
The CSP must act in good faith, must not know that the information is incomplete and state that it makes no representation as to the accuracy of the information.
CSPs must disclose investment-related information at least annually, according to the final rules. Changes in information previously disclosed must be disclosed within 60 days.
Effective date delayed
The interim final regulations issued in 2010 specified an April 1, 2012 effective date for the service provider disclosure rules. The final regulations extend the effective date to July 1, 2012.
This affects the effective date of the participant-level disclosure rules, which is 60 days after the effective date of the service provider rules. The result is that, for calendar year plans, the initial disclosure of plan-related and investment-related fee information must be furnished to participants no later than August 30, 2012.
The initial disclosure of fees and expenses actually deducted from the participant’s account must cover the July through September calendar quarter and be furnished to the participant by November 14, 2012.
DOL Fact Sheets are available
The DOL has made available two helpful fact sheets. The first, “Final Regulation Relating to Service Provider Disclosures Under Section 408(b)(2),” is available at http://tinyurl.com/DOLFactSheet-1FinalRegFeb2012. The second, “Changes to Final Fee Disclosure Rule,” is at http://tinyurl.com/DOLFactSheet-2FinalRegFeb2012
