The Employee Benefits Security Administration of the U.S. Department of Labor (“DOL”) recently released its long awaited service provider fee disclosure regulation, which was published in interim final form on July 16, 2010. This regulation (the “Regulation”) establishes new disclosure requirements for certain service providers to employee pension benefit plans, including financial institutions that provide trustee, investment management or investment advice to pension and retirement plans, or recordkeeping or brokerage services to 401(k) and other participant- directed plans. The purpose of the Regulation is to ensure that pension plan fiduciaries have sufficient information to assess whether plan service arrangements, including the fees paid for services, are reasonable.
Implementing the new disclosure and other requirements imposed by the Regulation is expected to require substantial effort and expense on the part of financial institutions and other entities that are covered by the Regulation. In particular, recordkeepers and others providing certain services to 401(k) and other participant-directed pension plans will face significant new disclosure obligations. However, the new rules as reflected in the Regulation are less burdensome in some respects than DOL’s initial proposal, issued in December 2007. For example, in the final Regulation, the DOL eliminated proposed requirements for formal written contracts between plans and covered service providers and also narrative disclosure of potential conflicts of interests by service providers.
The Regulation amends the Department’s existing regulations under ERISA section 408(b)(2) (at 29 C.F.R. § 2550.408b-2), which provides an exemption from ERISA’s prohibited transaction restrictions for “reasonable” service arrangements. If a service arrangement does not comply with conditions under ERISA section 408(b)(2), the plan fiduciary approving that arrangement may be deemed to violate its fiduciary duties by causing the plan to engage in a prohibited transaction and liable to the plan for resulting losses. In addition, the service provider participating in the prohibited service arrangement may be required to “correct” the prohibited transaction, including possibly repaying some or all of its compensation, and also may be liable for excise taxes under section 4975 of the Internal Revenue Code as a penalty for engaging in a prohibited transaction with a pension plan. We discuss this further in the attached article.