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Follow-up On Your ERISA Service Provider Disclosures!

Submitted By Firm: Bond, Schoeneck & King, PLLC

Contact(s): Louis P. DiLorenzo, Thomas G. Eron


Date Published: 8/28/2012

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Now that the deadline has passed for ERISA retirement plan service providers to deliver enhanced disclosures to plan administrators about the cost of services, put a follow-up item on your to-do list.

After several revisions and delays, the United States Department of Labor finalized the July 1, 2012 deadline requiring service providers to most retirement plans to deliver detailed disclosures about the services provided to plans and the cost of those services. Fiduciaries, recordkeepers, brokers and other service providers who receive "indirect" compensation from a plan are required under the DOL regulation to provide a disclosure to the plan administrator, usually the employer who has adopted the plan or an appointed individual or committee. "Indirect" compensation consists of fees, expenses and other assessments taken from plan assets that are in turn paid to or kept by service providers.

The disclosures should include: 

  • A description of the services.
  • The provider's status with respect to the plan.
  • An identification of specific costs for recordkeeping and administration services, as well as investment services. Under these rules, an "all in" fee that does not provide a breakdown between investment management fees and administration/recordkeeping fees is insufficient.
  • The source of the compensation payments such as commissions, 12(b)-1 fees, soft dollars, sub-transfer agency fees, wrap fees, and other arrangements used to derive compensatory payments out of plan assets.
  • Termination fees, redemption fees, surrender charges, and other costs imposed on various transactions.
  • Investment management and other operating expenses connected with the investment of plan assets.

If the fees are not reasonable, the arrangement is a "prohibited transaction," a violation of fiduciary prudence under the law and subject to sanctions. Furthermore, if the proper disclosures are not made, the arrangement is treated as a prohibited transaction regardless of the nature and extent of compensation payments.

The DOL disclosures are required for virtually all retirement plans, including both traditional defined benefit plans and individual account plans, such as 401(k) and 403(b) plans. A significant point to remember about the fees associated with most individual account plans is that these fees are typically taken directly out of participant accounts. This fact is the basis of recent litigation coming from plan participants claiming that unreasonable fees have improperly reduced their plan benefits. For fiduciaries sitting on plan administration committees, a point to remember is that you are spending other people's money when entering into plan service agreements and other arrangements with service providers.

So what should the plan administration committee do with the recently received disclosures?

The most notable effect of the new disclosures has been a "compression" (meaning a reduction) in plan expenses. Here is one occasion where government regulation has actually resulted in cost-savings for plans and their participants. In multiple cases, we have seen service providers "find" cost-savings in the arrangement, resulting in lower asset-based fees and a benefit to all participants. These cost savings may be lower-priced mutual fund share classes or an identification of revenue sources that can be rebated to participants or used for other plan expenses.

The plan administration committee should review the disclosure to make sure that it is complete and determine whether all covered service providers have provided the required disclosures. If any disclosures are incomplete, or a plan service provider has failed to provide a required disclosure, the service provider should be contacted and informed of the failure. In certain circumstances, plan sponsors are required to terminate arrangements with covered service providers if the service providers fail to respond to plan requests regarding the insufficiency or unavailability of required disclosures.

Probably the most critical next step for plan administration committees and responsible managers is to evaluate or "benchmark" the fees being charged to the plan. This can be done by comparing fee levels to other similar plan arrangements or averages. Some plans have chosen to issue requests for proposals (RFPs) to multiple service providers to obtain actual fee proposals from other providers. Others have hired outside consultants to benchmark fees.

The RFP process can be time consuming and tedious. It may not be the best way to evaluate the disclosures you have received. If, apart from the fees, there are issues in the quality of the services being provided to the plan, however, the RFP process can be important not only in getting a better price on service, but also in identifying a new, hopefully better, provider.

The overall fee disclosure changes have caused notable improvements in the 401(k) and 403(b) "industries." It is an important time for plan sponsors to look closely at all service arrangements and, in most cases, to get a better deal for the plan and its participants. Plan fiduciaries need to follow-up!

If you have any questions about this memorandum or about the fiduciary responsibilities described in the memorandum, please contact John Godsoe (716.566.2850, or Dan Sharpe (716.566.2846, in our Buffalo office or any of the members of our Employee Benefits and Executive Compensation Practice Group.

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