Employers Must Act on Retirement Plan Service Provider Disclosures
Retirement plan sponsors should by now have received detailed fee disclosures from their plan’s service providers. United States Department of Labor regulations required that by July 1, 2012, service providers furnish information concerning the services being performed; the cost of such services; the payment sources of the service provider’s compensation; and the service provider’s fiduciary status, if applicable. Affected retirement plans include defined benefit and defined contribution plans (such as 401(k) plans), as well as ERISA-covered 403(b) plans. The underlying compliance issue addressed by these new regulations is that, under ERISA, all plan service provider arrangements must be “reasonable,” with any arrangement not meeting this standard being deemed a “prohibited transaction.” Civil liability and excise tax consequences are imposed on all parties involved in approving and participating in a prohibited transaction.
The disclosure regulations apply to providers of ERISA fiduciary services, registered investment advisers, and recordkeepers and brokerage firms making available designated investment alternatives for self-directed individual account plans. In addition, individuals or firms receiving indirect compensation (i.e., payments other than from the plan or from the plan sponsor) who provide accounting, actuarial, auditing, appraisal, legal and third party administration services must satisfy the disclosure requirements. Service providers expecting to receive less than $1,000 under an arrangement are not required to furnish these disclosures.
The plan administrator must review the service provider disclosures to determine the reasonableness of each arrangement, including the reasonableness of the compensation and whether any conflicts of interest exist. This process involves looking beyond the amount of fees directly expended by the plan for services, to encompass the total compensation received by a service provider from all sources, including revenue sharing arrangements and marketing fees paid by third parties, such as mutual funds.
The plan administrator has a duty to ensure that the service provider disclosures are received and that they are complete, failing which the administrator should immediately request that the service provider promptly furnish fully compliant disclosures. Absent a satisfactory response within 90 days, the plan administrator, to avoid itself being deemed a party to an ERISA prohibited transaction, must notify the Department of Labor concerning the service provider’s noncompliance. The plan administrator must also determine whether to discontinue the relationship with the service provider.
The plan administrator’s duty under ERISA to engage only in reasonable service provider arrangements may entail benchmarking of fees within a peer group of similar plans, issuing a request for proposal to prospective service providers and replacing service providers in cases of unsatisfactory performance, excessive fees or conflicts of interest. Some situations may call for a renegotiation of service provider contracts. Plan administrators who are not sufficiently knowledgeable or inclined to undertake this process alone should consult a professional advisor to assist them in meeting their fiduciary obligations in connection with their plans’ service provider arrangements.