In February, the Department of Labor promulgated final regulations on the fee information investment managers, some broker-dealers and other selected service providers with respect to ERISA assets must provide to the fiduciaries who engage them. These final regulations amend the interim final regulations the Department issued in July of 2010 on this same topic. They extend the relevant deadline from April 1, 2012 to July 1, 2012 and, like the interim final regulations, affect existing as well as new engagements. The greatest importance of the Department’s action may well be the reminder it provides relevant parties that they need to begin considering now how they will comply with the Department’s regulations, if they have not already done so.
As with the interim final regulations, the final regulations only address fee disclosure by “covered service providers,” defined as:
Any fiduciary for an ERISA plan who engages others to perform services on behalf of the plan likewise must consider how to deal with these rules. Although not required to provide disclosure, they have a duty to obtain the disclosure and take action (including termination of the provider’s services) when required disclosure is not forthcoming. These persons generally include plan sponsors and their agents (for example, “investment committees”) but may also include others, such as some trustees and investment managers.
An Initial Word of the Meaning of ERISA Plan
As in the interim final regulations, these fee disclosure requirements do not apply to individual retirement accounts, SIMPLE Retirement accounts, SEPs or plans covering only the sole owner (or spouse) of the sponsoring employer (often, “Keogh plans”). The final regulations add yet another category of excluded plans for this purpose: “frozen” 403(b) contracts no longer (since January 1, 2009) receiving employer contributions where the participant is fully vested and all of his or her rights are enforceable against the issuing insurer or custodian without the involvement of the participant’s employer.
The Department’s “Hook” – The Exemption for Necessary Services for Reasonable Compensation
The Department has no explicit authority in ERISA to regulate fee disclosure by service providers. But in many instances service providers must demonstrate that they are only providing necessary services for the operation or administration of an ERISA plan for reasonable compensation pursuant to reasonable arrangements (the “Necessary Services” Exemption). Otherwise, their services to the ERISA plan, and more to the point their receipt of compensation for such services, could result in penalties under the “prohibited transactions” rules of ERISA. The Department’s regulations thus state, quite literally, that no arrangement for the provision of services is reasonable without the fulsome fee disclosure mandated by the Department.
Because the Department relied on the Necessary Services Exemption to promulgate fee disclosure, one may argue that if a different exemption is being relied upon to hire service providers, the fee disclosure mandated under the Necessary Services exemption does not apply. For example, persons engaged to provide services by “in-house asset managers” or “INHAMs,” or by “qualified professional asset managers” or “QPAMs” could argue their engagements are covered by the class exemptions applicable to actions of QPAMs and INHAMs. However, the Department did not explicitly confirm this, despite requests from commenters. In addition, fiduciaries engaging other service providers on the basis of other exemptions should consider whether insisting on the same degree of fee disclosure will not eventually become the standard for what any prudent fiduciary would insist upon before engaging a service provider.
The Scope of the Fee Disclosure
The actual disclosure required is little changed by these final regulations. In general, it includes a description of the services to be provided, a statement of the status of the covered service provider, affiliates and subcontractors, the total amount of direct and indirect compensation expected (including any fees for fiduciary services or for recordkeeping and brokerage services, if applicable), how that compensation is to be paid, and, in a change from the interim final regulations, a description of the arrangement under which any indirect compensation is to be paid. Among the few significant changes or material observations are the following:
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