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Service Provider Fee Disclosures Under ERISA

Added by Hawley Troxell in Articles & Publications, Employment Law on August 31, 2011

Employers that sponsor qualified retirement plans should be aware of the new fee disclosure requirements that will apply to record keepers, trustees, brokers, and other advisors to qualified retirement plans beginning April 1, 2012. Although these fee disclosure requirements apply to the service providers, employer sponsors of retirement plans will be obligated to determine whether or not the service providers to their retirement plan have complied with the fee disclosure requirement. In addition, employers must be prepared to evaluate the information they receive to more closely scrutinize the fees being paid to service providers.

Failure to comply with the disclosure requirements may cause the employer and the sponsor to violate the prohibited transaction rules under ERISA, which may result in penalties imposed on service providers and plan sponsors. Set forth below is a summary of the action steps all employer sponsors of qualified retirement plans should be taking to comply with the April 1, 2012 deadline.

1. Identify the plan’s fiduciaries that will be responsible for compliance with the fee disclosure rules

Employer sponsors of a retirement plan should have a formal document that identifies the Board of Directors, an Employee Benefits Committee, or an employee of the employer sponsor who is authorized to make major administrative decisions with respect to the plan (i.e., the “responsible plan fiduciary”). The “responsible plan fiduciary” is the primary individual or group that must ensure that the fee disclosure requirements are satisfied. If an employer is not certain who is the “responsible plan fiduciary”, the employer should review the retirement plan document and any related corporate actions to determine who is designated as the “responsible plan fiduciary.” The employer should confirm that the plan documentation reflects actual administrative practice.

2. Identify the providers that are subject to the ERISA fee disclosure requirement

Generally the following service providers who receive $1,000 or more in compensation from the plan will be subject to the ERISA fee disclosure requirement:

  • Service providers with plan administrative discretion and/or investment discretion.
  • Managers of any investment vehicle (other than a mutual fund) that is offered as an investment under the plan that has a significant investment from other retirement plans.
  • Registered investment advisers providing services to the plan.
  • Providers of brokerage or record keeping services to a participant-directed individual account plan that makes at least one investment alternative available as an investment option to participants.
  • Other service providers such as actuaries, accountants, and lawyers who receive indirect compensation from the plan (i.e., their services are not paid for directly from the plan or the plan sponsor’s assets).

3. Request required fee disclosures before November 2011

Although the compliance deadline is several months away, employers that begin to review the fee disclosures from their service providers may discover that the fee disclosures are very complex. Accordingly, an employer will want to request the information early to allow sufficient time to review, evaluate, and ask questions concerning the disclosures it receives.

4. Determine if the disclosures provided by service providers are adequate

In general, service providers should disclose the following:

  • All direct and indirect compensation received from the plan.
  • How the compensation is received and if the compensation is paid to other providers.
  • The services provided for the compensation received.
  • If a service provider is serving in a fiduciary capacity or in a registered investment adviser capacity, the service provider must affirm that capacity in writing.
  • All termination fees for terminating a contract and the method for calculating refunds of pre-paid amounts.
  • If a record keeper makes investments available to the plan, the record keeper must disclose the fees and expenses charged against those funds.
  • If a record keeper does not directly charge the plan (or sponsor) for record keeping services, the record keeper must provide a good faith estimate of how much the services would otherwise cost the plan and an explanation as to how those costs were calculated.

If a service provider has not provided the required disclosures upon request by April 1, 2012 or has not made a good faith effort to comply with the disclosure requirement the “responsible plan fiduciary” should consider taking steps to report the failure in accordance with applicable guidance.

5. Determine if the compensation being paid for the services provided is reasonable

Once the employer sponsor has received the required disclosures, the plan’s fiduciaries should begin to organize and evaluate the information. The fiduciaries may consider comparing the fee disclosure information to the information that was provided in connection with the original decision to hire the service provider to determine if the fees remain reasonable. If an RFP or fee assessment was not done prior to engaging the service provider, the fiduciaries should consider doing an RFP or engaging an independent advisor to determine whether the fees are reasonable. For more information or questions about this article or ERISA in general, please contact a member of our Employee Benefits Group.