Final ERISA Service Provider Fee Disclosure Rules Go Into Effect July 1, 2012

By Darcy Norville

On February 2, 2012, the Department of Labor (“DOL”) issued final regulations requiring service providers to ERISA retirement plans to disclose information about the service providers’ compensation and potential conflicts of interest. The final rules replace interim final ERISA section 408(b)(2) regulations that were to go into effect on April 1, 2012. The DOL delayed the effective date of the final regulations for three months, to July 1, 2012, in order to give service providers more time to come into compliance with the new disclosure requirements. The service provider disclosure rules are described in our earlier Tonkon Tip.

The final regulations make the following changes to the interim final rules:

• The final rules clarify that compensation or costs may be described by dollar amounts, formulas, percentages, per capita charges, or other reasonable methods. A reasonable, good faith estimate of compensation or costs may be used if the covered service provider (“CSP”) cannot otherwise readily describe the compensation or cost, so long as the methods and assumptions used for the estimate are explained.
• Certain 403(b) annuity contracts and custodial accounts which were issued before January 1, 2009 are excluded from the types of plans covered by the final rule.
• The information about “indirect compensation” that must be disclosed has been expanded to include a description of the arrangement made between the payer and the CSP.
• The investment-related disclosure of annual operating expenses (e.g. expense ratio) that is required to be provided by fiduciaries that provide services to investment contracts, products or entities in which plan assets are directly invested, is revised to be consistent with the expense ratio disclosure that must be made to participants in participant-directed individual account plans, in order to facilitate such disclosure by plan sponsors to participants.
• Providers of record-keeping or brokerage services are required to furnish investment-related information on designated investment alternatives (“DIA”) under participant-directed individual account plans. The final rules allow this requirement to be satisfied by providing “pass-through” of current disclosure materials of the issuer of the DIA, if the issuer is (i) a registered investment company (i.e., a mutual fund); (ii) an insurance company qualified to do business in a State; (iii) an issuer of a publicly traded security; or (iv) a financial institution supervised by a State or Federal agency. The CSP must act in good faith, must not know that the materials are incomplete or inaccurate, and must state that it makes no representation as to the completeness or accuracy of the information
• The deadline for disclosures of all investment-related information is changed to “at least annually.” The interim rules had previously required that such information, including changes to investment-related information, be disclosed within 60 days. The deadline for disclosing changes to other (non-investment-related) information remains 60 days from the date the CSP is informed of the change.
• The deadline for providing information to a responsible plan fiduciary or plan administrator (“RPF”) upon request, in order to enable the RPF to meet its reporting and disclosure obligations, is changed to ‘”reasonably in advance of the date upon which” the RPF states that it must comply with the applicable reporting and disclosure requirements.
• The rules clarify that if a CSP discovers an error or omission in information previously disclosed, the error or omission must be corrected as soon as practicable, but not later than 30 days from the date the CSP learns of the error or omission.
• The final rule includes a class exemption that allows a RPF to avoid engaging in a prohibited transaction when a CSP fails to disclose required information. In order to take advantage of the exemptive relief, the RPF must request the information from the CSP in writing. If the CSP does not provide the information within 90 days, and the information relates to services to be provided in the future, the RPF must terminate the service arrangement.

For more information regarding the ERISA plan service provider disclosure rules please contact Darcy Norville (darcy.norville@tonkon.com, 503-802-2036), or another member of the Financial Services practice group.