The Employee Benefits Security Administration (EBSA) issued an extension of the dates that both the service provider/fiduciary level and participant level fee disclosure rules will be applicable.  The following are the key dates for calendar year plans to mark:

For non-calendar year plans, the participant-level rules apply to the first plan year after November 1, 2011 with initial disclosures due 60 days after the first day of the plan year but no earlier than May 31, 2012.  Quarterly disclosures are due 45 days after the end of the quarter in which the initial disclosures were made.  The discussion below assumes a calendar year plan.

The road to these deadlines has been long in coming.  The Department of Labor (DOL) issued interim final regulations on July 16, 2010 describing the new requirements for employee benefit plan service providers/fiduciaries to disclose compensation arrangements to plan fiduciaries.  The regulations were to be effective July 16, 2011.  In February 2011, an extension to January 1, 2012 was proposed.  In this final ruling, the effective date is April 1, 2012. By that date, service providers and fiduciaries should furnish fee disclosures to the plans.

The EBSA agreed with commenters that the participant-level rules should become effective after the fiduciary-level rules and announced that these rules would be effective 60 days later, which is May 31, 2012. By this date, defined contribution plans must provide fee disclosures to plan participants. (Note: defined benefit plans are not subject to participant plan disclosures.).

Who Must Disclose Fees and Compensation?

The regulations apply to defined contribution plans (401(k), profit sharing, 403(b)) and defined benefit pension plans. Welfare plans are not covered.  Service providers, such as trustees, investment managers, registered investment advisors, will be required to provide plan fiduciaries with information on both direct and indirect compensation.  For 401(k) plans, recordkeepers and brokers will need to disclose compensation if they make investment alternatives available through a platform or similar arrangement.

Service providers who reasonably expect to receive indirect (but not direct) compensation of $1000 or more because of their relationship with another service provider and its affiliates will be subject to these new disclosure rules.  These include providers of auditing, actuarial, consulting (investment-related or RFP facilitator) or recordkeepers. 

What Is A Fiduciary To Do?

These are not mere information requirements.  Plan fiduciaries will need to decide how to analyze the information they receive from service providers and fiduciaries and how to monitor compliance by the service providers/fiduciaries.  Reviewing and determining that contracts with providers are "reasonable" will become more important. To avoid a prohibited transaction, plan fiduciaries must determine that contracts and arrangements with service providers provide "reasonable" compensation.  Failure to provide the information or failure of compensation paid to be "reasonable" can result in a prohibited transaction with reporting and excise tax penalties.  Part of a "reasonable" contract will be a provision to comply with these new disclosure rules. 

Steps to Start Taking Now

Employers/plan sponsors should begin now to educate the investment and administrative committees and individuals with delegated authority to review and enter into service provider contracts.  If the employer's procurement function reviews service provider contracts, they will need to begin to factor in the information expected, the process for review of that information, and the steps taken if some or all of the information is not provided. Understanding what the new regulations provide and how a prudent fiduciary will handle that information is the first step and will lead to additional steps to be ready for the information.

Initially, fiduciaries should identify the plans affected and the current service providers.  Discussion of when and how the information will be provided should be conducted. Consider amending existing contracts to include the obligations under the new regulations. Look at new contracts for compliance provisions.

As service provider/fiduciary-level fee disclosure information begins to come in, plan fiduciaries for 401(k), 403(b) and other defined contribution plans will need to review the information, consider how to use it in participant-level disclosures, and determine what information is missing.  Many 401(k)/403(b) providers are planning to prepare participant-level disclosures, but many of these disclosures will not be available until 2012. For some plan sponsors, April and May of 2012 will mean a scramble to ensure that all material has been supplied and is formatted for disclosure to participants.

Understanding fee structures and levels can be a challenge.  Employers and plan sponsors should start now to review the regulations and to understand how fee structures work.  Review the regulations with your employee benefits counsel, investment advisor and 401(k)/403(b) provider. Outline your compliance steps.