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