New Regulations Require Quick Action by ERISA Service Providers

Frank F. Pasacreta — Assurance and Advisory Services

New Department of Labor (DOL) regulations under Section 408(b)(2) of ERISA require certain service providers of ERISA-covered employee-benefit plans to disclose information to plan fiduciaries, in writing, before July 1, 2012. The written disclosure must state the nature of the services being provided as well as the amount of compensation, both direct and indirect, that the provider expects to receive. The new DOL rules apply to service arrangements with fees of $1,000 or more.

Providers need to act soon: This information must be given to plan fiduciaries reasonably in advance of July 1 in order for the fiduciary to ensure that the services being provided are necessary and are reasonably priced. The DOL does not require a particular format for these disclosures; they need not be in the form of a legal document.

The DOL has placed the disclosure burden on the service provider. However, plan fiduciaries also have a role to play. They must be diligent about securing the proper disclosures from providers before July 1, or be at risk of violating their fiduciary duties under ERISA. If the required information is not disclosed by that date, the service arrangement will not be deemed reasonable, which may result in penalties. The DOL will consider the plan to have engaged in a prohibited transaction, making it subject to excise taxes and disclosure in the Form 5500 filing and in the plan’s audited financial statements.

What should a plan fiduciary do upon realizing that it hasn’t received the required disclosures by July 1? The fiduciary should first make a written request to the service provider for the missing information. If that proves unsuccessful, the fiduciary should contact the DOL’s Employee Benefits Security Administration in writing to report the violation.

Due to the complexity of the service provider disclosure rules and the additional reporting requirements for prohibited transactions, we also suggest that plan fiduciaries contact ERISA counsel if they do not receive the proper disclosures in a timely manner.

Important definitions. Covered service providers include those providing accounting, auditing, consulting, custodial, investment advisory, legal, recordkeeping, securities brokerage, third-party administration, and valuation services.

Indirect compensation is compensation received from a source other than the plan sponsor or the plan, including commissions, finder’s fees, and 12b-1 fees. Record keepers are also required to disclose the cost of recordkeeping services, even if these fees were not previously stated separately.

A key exemption. If the service agreement is with the plan sponsor and the plan pays no direct or indirect fees from plan assets, these new 408(b)(2) disclosures will not apply.

Please contact Frank Pasacreta or a member of the Frank, Rimerman + Co. ERISA engagement team if you have any questions.