Back in July of 2010, the Department of Labor (DOL) issued revised disclosure rules for providers of services to 401(k) and other retirement plans. According to the DOL, the new regulations, known as 408(b)(2), are aimed at assisting plan sponsors in assessing the reasonableness of contracts or arrangements, including the reasonableness of the service providers' compensation and potential conflicts of interest. This is great news for plan sponsors who have struggled to understand and evaluate the actual fees their plan providers were charging them.
Summary of the New 408(b)(2) Regulations
The new interim 408(b)(2) regulations require service providers to disclose details of their services and compensation (including fees associated with recordkeeping services), as well as disclose whether or not they are acting as fiduciaries to the plan. The regulations applied to a “covered” service provider which the DOL defines as a service provider that enters into a contract or agreement with a covered plan and reasonably expects to receive $1,000 or more in direct or indirect compensation in connection with providing one or more specified services. Examples include those providing services as an ERISA fiduciary, registered investment advisor, brokerage firm or record keeper as well as subcontractors, affiliates and others who receive indirect compensation (e.g. banking, consulting, custodial, insurance, legal, etc.) For a more detailed description of the 408(b)(2) regulations, along with the DOL’s description of “covered” service providers and “covered” services, click here.
Information You Will Now Receive as a Plan Sponsor
Under the new regulations, your service providers will now need to disclose to you, as a plan sponsor, the following information. This information must be provided as of July 16, 2011, regardless of whether your contract was entered into prior to that date.
- A description of the services provided
- A statement of whether or not the service provider (and/or an affiliate or subcontractor) will or expects to provide services as a fiduciary and/or a registered investment advisor
- A description of all direct and indirect compensation the service provider (and/or affiliate or subcontractor) expects to receive in connection with the services provided (including commissions, fees, etc.)
- A description of any compensation the service provider (and/or affiliate or subcontractor) expects to receive in connection with termination of the contract or arrangement as well as a description of how any prepaid amounts would be calculated and refunded upon termination
Greater Transparency Helps Plan Sponsors Meet Their Fiduciary Responsibilities
Again, this is great news for plan sponsors who have struggled to understand and evaluate the actual fees their plan providers were charging them. This will shed a bright light on the true nature of what plan sponsors and plan participants are receiving for their investable dollars. Plan sponsors will now have access to consistent data on recordkeeper fees and soft dollar revenue sharing (known as Sub-TA). They will also be able to clearly understand the role their plan providers play (are they a fiduciary or not). Without a doubt, the availability of more precise information will make for better-educated buyers and serve to facilitate the process of ensuring compliance with ERISA’s rigorous standards.
This is a good thing but I caution plan sponsors… this is not the “be all/end all”. There is so much more involved in meeting fiduciary obligations and ensuring a plan is in compliance with ERISA. Many plan sponsors are unaware of the exact nature and the full extent of their fiduciary obligations. It’s ironic that merely one year ago, if plan sponsors took meeting minutes it more than likely meant they were complying with ERISA and its documentation requirements under the Pension Protection Act of 2006. Now, it means almost nothing! There is so much more that plan sponsors must do. A fiduciary’s responsibilities entail a wide range of matters including benchmarking plan fees and expenses, selecting and monitoring the appropriate investments, complying with reporting and disclosure requirements, understanding and implementing legislative updates and offering employees the proper educational tools to stay informed.
So while it’s OK to rejoice over the new disclosure regulations, it’s also important to maintain a realistic perspective on the full scope of your fiduciary responsibilities and the importance of defining, implementing and monitoring a clear and prudent process that maximizes plan efficiency, ensures compliance with ERISA’s rigorous standards and allows for the delivery of a best-in-class retirement plan for your employees. Who was it that said, “with great power comes great responsibility”? In this case, that couldn’t be more true…
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