Department of Labor Extends Fee Disclosure Deadlines in Final Rule on Service Provider Disclosures

The DOL published its long-awaited final rule on service provider fee disclosures on February 3.  The final rule replaces an interim final rule that was published on July 16, 2010.  The rule applies to section 408(b)(2) of ERISA, that provides relief from ERISA prohibited transaction rules for arrangements  between a plan fiduciary and a plan service provider if the contract or arrangement is reasonable, the services are necessary for the establishment or operation of the plan, and any fees are reasonable.  Under the rule, certain service providers providing certain services must make specific disclosures in order to meet the reasonable fee requirements of section 408(b)(2).  The disclosures are intended to help the plan fiduciary determine if fees are reasonable.  If the requirements are not met, the plan fiduciary and the service provider have engaged in a prohibited transaction.  Click here for an updated comprehensive summary of the rule.

The final rule contains several changes from the interim final rule.  Here are the highlights:

• The effective date is July 1, 2012.  Under the interim rule, it was April 1, 2012.  It applies to disclosures regarding contracts or arrangements between covered plans and covered service providers as of the effective date.  Disclosures are required “reasonably in advance” of entering into a contract or arrangement between a covered plan and a covered service provider, and any extension or renewal of such contract or arrangement.  For contracts or arrangements entered into prior to the effective date, the information required to be disclosed must be furnished no later than the effective date.  
• The effective date for participant fee disclosure is 60 days after the effective date of this rule.  For plan years beginning on or after November 1, 2011, the initial disclosure will be required no later than August 30, 2012.  The first quarterly disclosures are required 45 days after the end of the quarter in which the initial disclosure is required to be furnished.  This date is November 14, 2012.
• Some 403(b) plans are excluded from the rule.  Specifically, 403(b) annuity contracts and custodial accounts issued to a current or former employee before January 1, 2009, for which the employer ceased to have any obligation to make contributions (including employee salary reduction contributions), and, in fact, ceased making contributions to the contract or account for periods before January 1, 2009, and for which all of the rights and benefits under the contract or account are legally enforceable against the insurer or custodian by the individual owner of the contract or account without any involvement by the employer, and for which such individual owner is fully vested in the contract or account, are not covered plans under the rule.
• The disclosure rule for indirect compensation includes a new requirement to describe the arrangement between the service provider and the payer of the indirect compensation.  This should help plan fiduciaries assess any potential conflicts of interest.
• The disclosure rules are better aligned with the participant fee disclosure requirements.  The total operating expenses for designated investment alternatives (participant directed investments other than a brokerage window) must be calculated and expressed in accordance with the participant fee disclosure rule.  Additionally, any other information about a designated investment alternative that is required to meet the participant fee disclosure rule must be disclosed if the information is “within the control of, or reasonably available to” the service provider.  
• The “pass through” rules permitting recordkeepers to provide investment-related disclosures by providing materials from the investment issuer are relaxed.
• Changes in investment disclosures must be disclosed at least annually.  In the interim rule they had to be disclosed in 60 day.  The change is intended to prevent a flood of information about very small changes in investment fees. However, such a delay in material changes might present issues for plan sponsors in meeting their fiduciary duty to monitor plan investments.  
• Requests by a plan fiduciary for additional information needed to satisfy reporting and disclosure requirements must be provided reasonably in advance of the date the information is needed to comply with a specific requirement. Previously, the information had to be provided within 30 days of receipt of the request.  
• Relief was provided to permit a “reasonable and good faith” estimate of compensation as a last resort.
• An important change was made to the exemption for plan fiduciaries that do not receive the required disclosures.  If a service provider does not respond to a written request for information “promptly after the end of the 90-day period (or earlier if the provider refuses the request), and the information relates to future services, the plan fiduciary shall terminate the contract as soon as possible.  
• Summary disclosures – In the interim final rule, the DOL requested comments on whether or not service providers should be required to offer a “summary road map” of their disclosures.  The final rule reserved judgment on this issue.  Simultaneously, the DOL announced a new separate rulemaking process to address this issue.  Currently, service providers can meet the disclosure requirements by providing documents, from different sources and at different times, that contain required disclosures.  These documents may be voluminous in nature.  The final rule includes a voluntary “sample guide to initial disclosures” in which a provider identifies where specific disclosures can be found in a myriad of documents.  PSCA believes that the final rule should be amended to require the disclosures to be provided in a single document.