DISCLOSURE OBLIGATIONS FOR SERVICE PROVIDERS

On July 1, 2012, the United States Department of Labor’s (“DOL”) final regulation on ERISA Section 408(b)(2)(found at 29 C.F.R. Section 2550.408b-2) went into effect. The regulation requires organizations that provide services to ERISA-covered defined benefit and contribution plans to disclose to plan fiduciaries the compensation they receive, both direct and indirect, for work performed for the plan. 29 C.F.R. Section 2550.408b-2(a)(3).
In implementing this final regulation, the Department of Labor reasoned that an increased level of disclosure from service providers will allow plan fiduciaries to better assess whether or not the charges are reasonable for the work performed, as required by the prohibited transaction exemption found at 29 C.F.R. 2550.408b-2(a)(3), and whether or not any conflicts of interest exist. According to the DOL, the regulation does not apply to simplified welfare plans, employee pension plans (SEPs), SIMPLE retirement accounts, IRAs, and certain annuity contracts and custodial accounts described in Internal Revenue Code section 403(b).

Covered service providers are those who receive compensation of at least one-thousand dollars ($1,000.00) in compensation for work performed during the plan year, and who serve in capacities such as record-keepers or brokers, registered investment advisors, and fiduciary service providers. Accountants, auditors, actuaries, bankers, insurance brokers, attorneys and others, are only considered to be covered service providers if they receive indirect compensation in connection with services they provide to the plan. Indirect compensation is monetary and non-monetary payment from sources other than the plan in connection with services rendered to the plan, and generally includes commissions, service fees, maintenance fees, 12b-1 fees, and finder fees. Non-monetary compensation generally includes meals, travel, gifts, and tickets to sporting and entertainment events.

Upon request from the plan, service providers must take a position on whether or not they consider themselves to be a service provider covered by the regulation. Where a provider does not consider itself to be a covered service provider, the plan must be provided a written explanation supporting that position. Where a provider is covered, they must provide a written response describing the services they provide to the Plan, as well as all direct and indirect compensation they receive for services provided to the plan. Where indirect compensation is received, the provider must describe the arrangement pursuant to which that compensation is paid.

Where a service provider fails to respond to a request, the plan fiduciary can notify the DOL of the non-compliance. Non-compliance by a service provider can result in the arrangement being classified as a prohibited transaction under ERISA, with the possible penalties that follow that classification. Once a service provider has made the required disclosures, service providers must provide this information when requested by a plan fiduciary, and must inform the plan within sixty (60) days of a change in the information previously provided.