New ERISA Service Provider Disclosure Requirements

5/21/2012 - By Zachary Farrington

On February 3, 2012, the U.S. Department of Labor issued the long-awaited final service provider fee disclosure regulation under Section 408(b)(2) of the Employee Retirement Income Security Act of 1974 (ERISA). The regulation requires certain service providers to make written disclosure of their services and fee arrangements to a responsible plan fiduciary. A responsible plan fiduciary is defined as a fiduciary with authority to cause the plan to enter into, or extend or renew, the contract or arrangement, and typically includes the plan sponsor, officer, trustee or custodian. The disclosure must be made reasonably in advance of entering into, extending, or renewing a contract or service arrangement with that provider. The rule does not require a particular format for the required disclosures, which may be contained in a single document or in multiple documents.

Background

ERISA requires plan fiduciaries, when selecting and monitoring service providers and plan investments, to act prudently and solely in the interest of the plan's participants and beneficiaries. Responsible plan fiduciaries also must ensure that arrangements with their service providers are "reasonable" and that only "reasonable" compensation is paid for services. According to the Department of Labor, reasonable compensation does not mean that a plan fiduciary needs to select the cheapest provider. An unreasonable arrangement could lead to a prohibited transaction. By requiring covered service providers to disclose their fee arrangements, plan fiduciaries will have a means to compare service providers on an even playing field with all of the services and fees they provide being disclosed and all parties involved identified. The disclosures will also provide plan fiduciaries with knowledge of any potential conflicts of interest.

When is the new Service Provider Disclosure rule effective?

The rule goes into effect on July 1, 2012. This means that covered service providers must provide the required disclosures to the plan fiduciary for any arrangements with a covered plan that will be renewed, extended or entered into as of July 1, 2012. What does this mean for Plan Fiduciaries? Plan fiduciaries must be diligent to secure the proper disclosures from covered service providers to the plan and should implement a process to ensure:

The sufficiency and accuracy of the information received from the service provider pursuant to the final regulation;
Timely receipt of all information, including any changes to previously provided information;
Timely requests to service providers for required information, especially with respect to any indirect compensation;
A format and disclosure language that is understandable to the plan participant population involved;
Appropriate notice and action if the information is not timely provided or is deficient;
Appropriate indemnifications with respect to timely compliance; and
Appropriate documentation of the receipt of the information, the fiduciaries’ consideration of it, and any actions taken.

Who is a “Covered Service Provider”?

The final regulation defines a covered service provider as “a service provider that enters into a contract or arrangement with the covered plan and reasonably expects $1,000 or more in compensation, direct or indirect, to be received in connection with providing” certain specified services, including fiduciary or registered investment advisor services, and recordkeeping or brokerage services. It also applies to other services for which the covered service provider expects to receive indirect compensation; these other services include accounting, auditing, actuarial, banking, consulting, custodial, insurance, investment advisory, legal, recordkeeping, securities brokerage, third party administration, or valuation services. Indirect compensation is compensation received from a source other than the plan sponsor or the plan itself.

What is a “Covered Plan” for purposes of the service provider disclosure rule?

This regulation applies to ERISA-covered defined benefit and defined contributions pension plans, including 403(b) annuity contracts and custodial accounts subject to ERISA. It does not apply to simplified employee pension plans (SEPs), SIMPLE retirement accounts, employee welfare benefit plans, and IRAs. Also exempt are annuity contracts and custodial accounts in 403(b) plans that were issued to employees before January 1, 2009, where no additional contributions have been made, and the contract is fully vested and enforceable by the employee.

What information needs to be disclosed? Covered service providers are required to disclose (before the parties enter into an agreement for services):

All services to be provided under the agreement
The compensation or fees to be received for each service
The manner of receipt of compensation or fees
Information about conflicts of interest

What happens if the Plan Fiduciary (Plan Administrator) does not receive the required disclosures by July 1, 2012?

The disclosure burden is on the service provider. However, if the information is not disclosed by July 1, 2012, then the contract or arrangement between the plan and the service provider will not be deemed reasonable under ERISA, and the plan will have engaged in a prohibited transaction, not only subject to excise taxes but required to be disclosed in both a supplemental schedule to the 2012 Form 5500 filing and the Plan’s 2012 audited financial statements, if the Plan is subject to audit.

If this occurs, the plan fiduciary should first make a written request to the covered service provider for the missing information. If that proves unsuccessful, the plan fiduciary should contact the Department of Labor’s Employee Benefits Security Administration (EBSA). Conclusion Due to the complexity of the service provider disclosure rules, and the additional reporting requirements for prohibited transactions, we suggest that you contact ERISA counsel to ensure you receive the proper disclosures in a timely manner. For more information, please contact Judy Fryer at (800) 477-7458. © 2012 EisnerAmper LLP