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New ERISA Fiduciary Responsibility Requirements – Coming Soon

Thomas J. McLaughlin

The Department of Labor (“DOL”) recently issued final amendments to the regulations that require enhanced disclosures for qualified retirement plans. These new rules take effect in early 2012 and require each sponsor of a qualified retirement plan to begin taking actions NOW to assure that timely compliance with the rules will occur. 

The new rules create two new types of disclosure requirements. First, the new rules require enhanced disclosures about fees, services and terms from plan service providers to plan fiduciaries. These disclosures apply to all qualified retirement plans. Currently, the effective date of the service provider regulations is April 1, 2012. 

Second, the new rules require enhanced fee disclosures from plan fiduciaries to participants and beneficiaries eligible to direct investments in participant-directed 401(k) plans or other individual account defined contribution plans. These requirements apply to qualified retirement plans as of May 31, 2012. 

Once effective, the regulations create new ERISA fiduciary duties and substantially expand the duties of plan service providers and plan fiduciaries. As a result of the breadth and nature of the additional required disclosures, plan sponsors need to prepare in advance to comply with the new regulations that are discussed in more detail below. 

Service Provider Disclosure Regulations 

Effective April 1, 2012, all covered service providers must disclose information to the plan’s official “plan administrator” (usually the plan sponsor or plan committee) describing amongst other things: 

• The compensation the service provider receives,
• Any termination charges that will apply if the service relationship is terminated,
• The services the provider has agreed to render,
• A statement indicating whether the service provider is a fiduciary to the plan, and
• Any potential conflict situations that exist. 

The regulations requiring service provider disclosures are designed to assist plan fiduciaries in determining the reasonableness of compensation paid to plan service providers and identifying potential conflicts of interest that may impact a service provider’s performance. 

While plan fiduciaries (i.e., the plan sponsor or plan committee) have always had a fiduciary duty to evaluate and decide whether compensation paid to service providers is reasonable for the services provided, the historical practices of the service provider industry have made it difficult for fiduciaries to obtain complete and accurate information about compensation received by the service provider and conflicts of interest that the service provider may have. The new regulations are designed to force service providers to deliver this necessary information so that plan fiduciaries can do their jobs. 

Once the new regulations take effect, plan fiduciaries will be expected to (i) make sure that required disclosures are received, (ii) review and understand the information received, and (iii) make informed decisions, based on that information, about whether the compensation being received by the service provider is reasonable and appropriate for the services being performed. In addition, plan fiduciaries who become alerted to conflicts of interest, or who determine that compensation payments are not reasonable must take action to address those issues. Plan fiduciaries who neglect these duties will likely find themselves subject to DOL investigations and/or participant lawsuits. 

The disclosures from service providers must be made in writing and must contain information about both direct and indirect compensation being received by the service provider (or an affiliate or subcontractor), including the services to which the direct or indirect compensation relates and the payer of the compensation. If possible, plan administrators should modify existing contracts with plan service providers to impose the obligation to provide this required information on the service provider. 

Plan fiduciaries who do not take steps to obtain the required information from service providers will be liable for a breach of ERISA fiduciary responsibility. However, an exemption is available to unknowing plan fiduciaries when a covered service provider fails to comply with its disclosure obligations. The fiduciary must meet certain conditions to receive the exemption, including requesting in writing that the covered service provider comply with its disclosure obligations and then providing the DOL with notice of the failure. 

Participant Disclosure Regulations 

The participant disclosure regulations require the official “plan administrator” (usually the plan sponsor or the plan committee) to disclose certain information on an annual and quarterly basis to all plan participants and beneficiaries who have the right to direct the investment of assets held in their accounts. In general, the information that must be delivered describes the fees and expenses that may be charged against the participant accounts as well as investment information. The deadline to begin providing required disclosures to participants is the later of: 

• May 31, 2012, or
• 60 days after the first day of the first plan year beginning on or after November 1, 2011. 

A calendar year plan has until May 31, 2012 to provide the initial annual notice to participants. 

Under the new regulations, the plan administrator must disclose “plan-related information” and “investment-related information.” The plan administrator may delegate the disclosure obligations to its service providers; however, the plan administrator remains ultimately liable for complying with the disclosure requirements. 

Plan Related Information: Overall, there are three primary types of plan-related information that must be disclosed: 

1. general information (e.g., investment options offered, specific limitations on the participant’s investment rights, and any voting, tender, or similar rights related to the investment options),
2. administrative expenses (e.g., fees and expenses for general plan administrative services, including the allocation (pro-rata, per capita, or other basis) of such fees and expenses), and
3. individual expenses (e.g., fees or charges that may be charged to a participant’s individual account on an individual basis, including plan loan expenses, QDROs, fees for investment advice, redemption fees, front-end or back-end loads, and transfer fees). 

Investment Related Information: In addition to the plan-related information, plan administrators must provide participants and beneficiaries with investment-related information. There are very specific requirements that must be complied with, including providing identifying information about investment options, average rates of returns over specified time frames, fee and expense information, a website containing specific information, and a glossary of investment and financial terms. The use of a chart or other comparative format is required so that employees eligible to participate in the plan can make informed investment decisions. 

Timing: Finally, the disclosures discussed above must be made at least annually, and some of the disclosures are required to be made on a quarterly basis. Any changes to plan-related information generally must be communicated at least 30 days prior and no more than 90 days before to the effective date of the change. 

Key Thoughts for Plan Fiduciaries 

Many plan sponsors mistakenly believe that the third party administration company is legally responsible for administration of the plan. In most situations, that is not the case and the “official” plan administrator is either the plan sponsor or a plan committee appointed by the sponsor. The official “plan administrator” should act now to become familiar with the disclosure regulations and to make arrangements with service providers regarding the required disclosures. Contact each service provider that receives payment from the plan’s assets and obtain their assurance, preferably in writing, that the required disclosures will be timely provided. In addition, consult with third party administration companies to arrange their assistance in preparing and delivering required disclosures to participants, if applicable. 

Plan administrators will not be liable for the completeness and accuracy of the required disclosures if they can demonstrate that they reasonably and in good faith relied on the information provided to them by service providers. Begin discussions with service providers now to demonstrate a good faith effort to obtain complete and accurate information. 

If you would like to discuss these new requirements with us, call or email a member of our employee benefits team of lawyers, Carol Myers (941-893-4001), Melanie Shaw (941-893-4002) or Tom McLaughlin (941-536-2042).
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