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Plan Sponsor Obligations Under New Retirement Plan Fee Disclosure Rules


March 19, 2012

By Daniel R. Salemi

As we have discussed in previous alerts, the Department of Labor (DOL) has issued two new rules that will affect how retirement plan fee information is disclosed.  These rules will become effective this summer.  The following is a general summary of plan sponsors’ legal obligations under the rules.

Service Provider Fee Disclosure Rule

One of the DOL’s new rules requires service providers to ERISA-covered retirement plans to disclose certain compensation information to plan sponsors.  This rule is referred to as the “Service Provider Fee Disclosure Rule,” and we discussed it in a previous alert.

Service providers are now required to send the disclosures to plan sponsors on or before July 1, 2012.  Although service providers are responsible for providing the disclosures, plan sponsors must also take certain steps.  The DOL has clarified in recent guidance that plan sponsors are required to:

  • First, identify every service provider to their plans, and determine which providers are required to provide a disclosure. 
  • Second, determine if each service provider who is required to provide a disclosure has actually disclosed all required information by the July 1, 2012 deadline.  If a plan sponsor determines that a service provider has not provided all required information, the plan sponsor must request the missing information from the service provider in writing.  If the service provider fails to comply with the plan sponsor’s request within 90 days, the plan sponsor must then notify the DOL and terminate the service provider (unless termination would not be reasonable because, for example, the plan would be required to pay an early termination fee).
  • Third, determine whether continuing each service arrangement is reasonable in light of the compensation information that the service provider reports in its disclosure.  This can be done with input from the sponsor’s outside advisors, but a plan fiduciary must make the ultimate determination of whether a service arrangement is reasonable.  If the plan sponsor determines that continuing a service arrangement is not reasonable, the plan sponsor must terminate the service provider.  

If a plan sponsor fails to take the above steps, a prohibited transaction could arise, and the plan sponsor could be assessed significant penalties and excise taxes.

Participant Fee Disclosure Rule

The other new DOL rule requires sponsors of retirement plans with participant-directed investments (e.g., 401(k) and ERISA-covered 403(b) plans) to disclose certain plan fee and expense information directly to participants.  This rule is referred to as the “Participant Fee Disclosure Rule," and we discussed the rule in a different previous alert.  Unlike the Service Provider Fee Disclosure Rule, the Participant Fee Disclosure Rule does not apply to defined benefit plans where participants do not direct their own investments.

Plan sponsors must send the required disclosures to participants on or before August 30, 2012 (for calendar year plans), and subsequent quarterly disclosures must be sent to participants beginning no later than November 14, 2012 for calendar year plans.

In order to satisfy the requirements of the Participant Fee Disclosure Rule, a plan sponsor can ask a third party administrator to provide the necessary disclosures to participants.  In our experience, this is what most sponsors of 401(k) and ERISA-covered 403(b) plans are doing.  But if this responsibility is delegated to a third party administrator, the plan sponsor will still be responsible for ensuring that the third party administrator actually sends complete disclosures to participants.  Plan sponsors should therefore review their third party administrator’s draft disclosures before they are provided to participants and beneficiaries, and sponsors should then get confirmation from their third party administrator that the disclosures have been provided by the August 30, 2012 and November 14, 2012 deadlines. 

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