4125 / What is the purpose of the Department of Labor (“DOL”) 408(b)(2) covered service provider disclosure regulations?

The DOL believes that the fee and cost structures associated with retirement plans can be complicated and difficult for retirement plans sponsors to understand. In an effort to bring clarity to the often confusing world of fees and expenses associated with retirement plans, the DOL has promulgated disclosure regulations intended to help shine a light on the costs of operating a retirement plan.

When selecting and monitoring service providers, ERISA requires plan fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries. Responsible plan fiduciaries must ensure that arrangements with service providers are “reasonable” and that only “reasonable compensation” is paid for services. Unfortunately, there is no bright line rule defining what constitutes “reasonable compensation.” In the 408(b)(2) regulations, the DOL states that “No contract or arrangement for services between a covered plan and a covered service provider, nor any extension or renewal, is reasonable” unless appropriate fee disclosures are made.

Thus, for any contract or arrangement between a covered service provider and an ERISA retirement plan to be considered “reasonable,” the covered service provider must make certain disclosures to the responsible plan fiduciary. Even if the service provided and the compensation received is fair and comparable with industry standards, if the disclosures are not made, the agreement will be considered unreasonable. The disclosures must be sufficiently detailed to allow a responsible plan fiduciary to evaluate the prudence of the agreement and must be made reasonably in advance of entering into the contract. The responsibility for making appropriate disclosures initially falls on the service provider, however, when required disclosures are not made, the plan sponsor must request the disclosures from the service provider. If the disclosures are still not made after the disclosure request, the responsible plan fiduciary must report the covered service provider to the DOL and seek out a new service provider. If the disclosures are not made or the reporting procedure is not followed, the arrangement will constitute a prohibited transaction subject to monetary penalties reportable to the DOL, and require correction.¹

Of course, merely making the required disclosures does not automatically make a contract or arrangement reasonable under ERISA. The compensation paid for the services provided must also be reasonable.

The disclosures were required to be in place for all existing service arrangements by July 1, 2012. New service provider arrangements on or after that date require these disclosures reasonably in advance of the entry into the contract.

All ERISA-covered retirement plans are treated as covered plans for purposes of these regulations. The DOL has specifically exempted non-ERISA retirement plans from the requirements of this regulation. Non-ERISA retirement plans include Simplified Employer Plans (“SEPs”), salary reduction SEPs (“SAR-SEPs”), SIMPLE IRAs, government plans, non-ERISA 403(b) plans, most church plans, top hat nonqualified deferred compensation plans and 457 plans.

Other types of qualified retirement plans that cover only a proprietor and spouse, or partners of a partnership and their spouses, are exempt from ERISA as well. On the date any common law employee becomes a participant in either of these plan types, the disclosures are required.