March 31, 2014
Authored by: benefitsbclp
Earlier this month, the Department of Labor published a proposed amendment to its February 2012 final regulations regarding the disclosures concerning services and fees that service providers must furnish to plan fiduciaries to permit the fiduciaries to determine that the contracts or arrangements with the service providers were “reasonable” as required by ERISA Section 408(b)(2). Under the amendment, service providers would be required to furnish plan fiduciaries with a “guide” to the fee disclosures required under ERISA Section 408(b)(2) in certain circumstances.
The 2012 final regulations (which generally became effective July 1, 2012) did not require service providers to provide the disclosures in any particular format. Moreover, the preamble to the regulations acknowledged that the disclosures could be made in multiple documents so long as the documents collectively disclosed all of the information required.
The proposed amendment is intended to introduce a guide to assist fiduciaries in locating the information they need to assess the reasonableness of the services provided and fees charged by the service provider. The guide is required if the disclosures are made in multiple documents or a “lengthy” document. The Department has requested comments on the page requirement that would trigger the index requirement as well as whether future guidance should include formatting standards (such font or margin requirements) to avoid manipulation of any adopted page requirement. The guide must identify the document and page or other sufficiently specific locator, such as a section, that enables the plan fiduciary to “quickly and easily” find the specified information. More guidance is welcome on what exactly is meant by “quickly and easily.”
The guide will be required to specifically identify the location of eight items of information:
- The description of the services provided;
- The services to be provided as a fiduciary and/or as a registered investment adviser;
- The description of the direct compensation paid to the service provider;
- The description of the indirect compensation paid to the service provider;
- The description of any compensation paid among related parties;
- The description of compensation paid upon termination of the arrangement;
- The description of compensation paid for recordkeeping services (as applicable); and
- The description of any compensation, annual operating expenses, and ongoing expenses (or, if applicable, total annual operating expenses) with respect to investments (as applicable).
The guide must also identify a contact person who can answer questions and provide additional information.
The proposal also notes that the guide must be provided “in a separate document;” at this point, it is unclear exactly what is required to meet that requirement.
As noted above, the Department has requested comments on the proposal, including the alternative approaches that the Department considered, such as requiring a summary of the disclosures and providing an exemption from the index or guide requirement for service providers who can demonstrate that providing the guide is either impossible or unduly burdensome. The comment period remains open until June 10, 2014.
Finally, the Department announced that while the comment period remains open, it will begin conducting eight to ten focus groups with about 70 to 100 fiduciaries of small plans (i.e., those plans with fewer than 100 participants). Among the matters that the Department intends to explore in these focus groups are the fiduciaries’ awareness and understanding of the 408(b)(2) disclosures, their experience with receiving and reviewing the disclosures received, whether the disclosures that they received affected their engagement or retention of service providers, whether they received a guide or index, and whether they think that a guide would be useful.
Since the focus group sessions may extend past the close of the comment period, the Department acknowledged that it may reopen the comment period to address items that come out of those sessions. It appears as if the fee disclosure rule project – which began in 2007 – is still a ways from completion.