Over the past several months, the Department of Labor (DOL) has adopted new rules under the Employee Retirement Income Savings Act of 1974 (ERISA) that will affect advisers who provide services to such plans. Each rule is designed to increase transparency of investments, fees and compensation. Advisers to ERISA plans should be aware of these new rules, which have compliance dates set for 2011.
Disclosures to Participants in 401(k)-type Plans
On October 20, 2010, the DOL adopted a final rule requiring plan administrators to increase disclosures to participants in participant-directed ERISA plans. The new requirements are designed to improve transparency of investments, fees and expenses, allowing plan participants to make informed decisions about the management of their individual accounts. To meet this new disclosure obligation, plan administrators will have to obtain the following information from the advisers who are providing the services.
First, the rule requires disclosure of plan-related information. Participants must receive the disclosures on or before they can first direct the investments, and annually thereafter. The required disclosure must include general plan information, administrative expenses and individual expenses. In addition, participants must receive, at least quarterly, statements showing in dollars the actual charges or deduction.
Second, plan administrators must disclose investment-related information. The rule describes this as the core information about each investment option under the plan, including performance data, benchmark information, fee and expense information, a website address where the participant may obtain additional information, and a glossary of terms.
The effective date of the rule is December 20, 2010; however, the rule changes are applicable to all individual account plans with plan years beginning on or after November 1, 2011.
Disclosures to Plan Administrators
On July 16, 2010, the DOL adopted an interim final rule, first proposed in 2007, amending regulations under §408(b)(2) of ERISA. Section 408(b)(2) contains a requirement that arrangements for services between service providers and plans be "necessary" and "reasonable." The amendment is designed to assist ERISA plan administrators in meeting this obligation.
The rule clarifies that, for a contract to be reasonable, the service provider must disclose information regarding the services provided to the plan, as well as direct and indirect compensation, to the plan administrator. This information is considered to be vital to ensure plan administers, as fiduciaries to the plan, can make informed decisions when selecting service providers for the plan.
The rule also creates the following requirements:
Changes to the disclosures must be made to the plan fiduciary within 60 days of learning of the change. Further, service providers must, upon request, supply to a plan fiduciary any compensation information relating to the plan.
- The information must be disclosed in writing. However, it does not have to be part of the service provider contract.
- Information regarding services and costs must be disclosed whether or not they are part of a bundle or package of services.
- Service providers must disclose whether they are providing any services as a fiduciary to the plan.
- The service provider must disclose information about the plan investments and plan options.
The rule does not apply to IRAs, SEPs, or Simple IRAs. The effective date is July 16, 2011.
Updating the Definition of "Fiduciary"
Although not yet adopted, the DOL recently proposed a rule updating the definition of "fiduciary" under ERISA. The DOL believes the existing definition, from 1975, does not adequately cover who is (or is not) considered a fiduciary to a retirement plan. The proposed definition should help clarify that question. We will issue a Compliance Alert as this important issue develops.