The Department of Labor (DOL) issued interim final regulations on July 16, 2010 describing the new requirements for employee benefit plan service providers to disclose compensation arrangements to plan fiduciaries.  The regulations are effective July 16, 2011, but plan fiduciaries and administrators should begin planning for compliance now.

Who Must Disclose 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?

This is not a mere information requirement.  Plan fiduciaries will need to decide how to analyze the information they receive and how to monitor compliance by the service providers.  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.

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 for the applicable employee benefit plans.  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 fee information to be disclosed.

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 contracts to include the obligations under the new regulations. 

As fee disclosure information begins to come in, plan fiduciaries will need to review the information, consider where to store it within document retention programs, and determine what actions to take if the compensation may be unreasonable. Policies and procedures to implement these regulations can help to protect plan fiduciaries.