EBSA Issues Long-Anticipated Final Rules On Retirement Plan Fee Disclosure

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The Labor Department's Employee Benefits Security Administration published in the Feb. 3 Federal Register (77 Fed. Reg. 5,632) the final version of its retirement plan fee disclosure regulations, along with a fact sheet on the final rule, and a separate document outlining changes from an earlier version issued last July.

“The common-sense rule that we are finalizing today will shed light on the true costs of [Section] 401(k) accounts and ultimately reward those working hard and saving for retirement,” Labor Secretary Hilda Solis said in a statement. “This rule, and its companion participant-level fee disclosure rule, will greatly increase the level of transparency in retirement plans. When businesses that sponsor retirement plans, and the workers who participate in those plans, get better information on associated fees and expenses, they'll be able to shop around and make informed decisions that will lead to cost savings and a larger nest egg at retirement.”

Practitioners expressed their relief that DOL has released its final regulations. “It's a relief to get a conclusion to this part of the overall process,” Thomas G. Schendt, a partner with Alston & Bird in Washington, D.C., told Bloomberg BNA Feb. 2. He called the situation surrounding service-provider disclosure a “perfect storm.”

“You have the courts going through and litigating cases on plan fees; the Department of Labor was issuing proposed, re-proposed, temporary, and now final regulations; and Congress was legislating. … It was the perfect storm for implementation, disclosure, and overall readjustment of people's practices, so this particular conclusion does end one of those venues,” he said.

The rules will be effective July 1 for both existing and new contracts between Employee Retirement Income Security Act plans and their service providers. The interim final rules were issued in July 2010 (61 BTM 231, 7/20/10); Labor proposed the rules in December 2007.

Service-Provider Disclosure Requirements

Under the final rules, covered service providers to ERISA-covered defined benefit and defined contribution plans must provide to plan fiduciaries the information required to:

• assess reasonableness of the total compensation, both direct and indirect, that a covered service provider receives from the contract;

• identify potential conflicts of interest; and

• satisfy reporting and disclosure requirements under Title I of ERISA.

“Covered service providers” include ERISA fiduciary service providers, investment advisers registered under federal or state law, brokers, and recordkeepers. An exhaustive list is available on a DOL fact sheet on the regulations, and the rule only applies to service providers that reasonably expect to earn $1,000 or more in total compensation under a service contract. A reasonable, good-faith estimate will suffice, an EBSA official said during a Feb. 2 conference call with reporters.

Regarding the permissible use of estimated compensation levels, Brian Graff, chief executive officer and executive director of the American Society of Pension Professionals and Actuaries, praised the rule's flexibility. “That is something we think is really important, especially for things like revenue-sharing and other matters. It's going to be a lot less costly to do reasonable estimates than exact dollar amounts,” he told Bloomberg BNA Feb. 2.

According to the fact sheet, the rule does not apply to simplified employee pension plans, savings investment match plans for employees of small employers, individual retirement accounts, certain tax code Section 403(b) annuity contracts and custodial accounts, or employee welfare plans.

Effective Date Challenges

The effective date in the interim final rules was April 1, but DOL extended it by three months in the final rules because the department did not issue the rules as early as it had anticipated, the EBSA official said during the call. Failure to comply with the requirements in the final rules will result in a prohibited transaction and an excise tax, the official said.

Despite being pleased that DOL extended the effective date for the final rule, some practitioners expressed concerns regarding the ability to comply within five months.

“We are, of course, pleased to have the final regulations to review at last. However, we remain concerned that the deadline for compliance, even with the latest DOL extension, is a mere five months away,” Ilene Ferenczy of the Law Offices of Ilene H. Ferenczy, Atlanta, told Bloomberg BNA Feb. 2. “Service providers to retirement plans need to digest 108 pages of new regulations. Then, those who have tried to comply so far will need to assess whether what they have done is sufficient,” she said.

“I expect the next few months will be fraught with challenges for the people who service retirement plans,” Ferenczy said.

In addition, the new effective date will have an impact on the participant-level disclosure regulations, the fact sheet said. Under the participant-level fee disclosure rule, disclosures must first be provided 60 days after the ERISA Section 408(b)(2) final rule effective date. Thus, the initial annual disclosure of “plan-level” and “investment-level” information must be furnished by Aug. 30. The first quarterly statement must be furnished by Nov. 14, the fact sheet said.

Model Guide Use

The final rules include a sample guide in an appendix that EBSA “strongly encourages” covered service providers to provide fiduciaries to help the fiduciaries “in identifying all of the disclosures required under the final rule, particularly when service arrangements and related compensation are complex and information is disclosed in multiple documents,” according to the DOLfact sheet.

DOL expects within the next few months to release a proposed rule under which covered service providers would be required to utilize such a tool to assist plan fiduciaries, the EBSA official said during the call.

“On the idea of a summary or guide, which DOL is proposing to require through a new rulemaking, DOL will need to think very carefully before applying that, and it was smart of them to take a step back,” said Michael L. Hadley, a partner at Davis & Harman in Washington, D.C. “Forcing the myriad of service models into a single disclosure format will be challenging,” he said.

Donald Myers, a partner at Morgan Lewis in Washington, D.C., added, “We still need to deal with a separate regulatory proceeding relating to a summary or guide. However, it is preferable to treat that issue separately rather than to include it in the final regulation.”

Changes From Interim Final Rule

In addition to the extended effective date, DOL changed the final rule to:

• exclude certain annuity contracts and custodial accounts described in Section 403(b) from the types of plans covered by the final rule;

• enhance the “indirect compensation” information a covered service provider must disclose to a responsible plan fiduciary;

• include a provision for the disclosure of changes to investment-related information, which must be updated at least annually; and

• conform the investment-related disclosures for covered plans' designated investment alternatives to the requirements of DOL's participant-level disclosure regulation.

By Stefanie Trilling