Wednesday, July 21, 2010

New DOL "Guidance" on Fees to Plan Service Providers

In recent years, the way services are provided to employee benefit plans (such as record keeping services and investment services) and the way service providers are compensated have become increasingly complex. Indeed, in the 401(k) plan context, there have been over the past few years myriad "excess fee" lawsuits challenging the fees paid by plans and plan fiduciaries to services providers. To address the issue, the United States Department of Labor ("DOL") announced last week an interim final rule that purports to "enhance disclosure to fiduciaries of 401(k) and other retirement plans." Although DOL has in the past issued (it its own words) "considerable guidance" relating to the obligations of plan fiduciaries in selecting and monitoring service providers, the interim final rule "establishes, for the first time, a specific disclosure obligation for plan service providers."

According to DOL, the rule will assist fiduciaries in determining both (1) the reasonableness of compensation paid to plan service providers, and (2) any conflicts of interest that may impact a service provider's performance under a service contract or arrangement. Generally speaking, the interim final rule will enhance disclosure to pension plan fiduciaries by requiring the disclosure of the direct and indirect compensation certain service providers receive in connection with the services they provide. The rule applies to plan service providers that expect to receive $1,000 or more in compensation and that (1) provide certain fiduciary or investment advisory services to plans, (2) make available plan investment options in connection with brokerage or record keeping services, or (3) otherwise receive indirect compensation for providing certain services to plans.

Plan service providers will now have to provide the plan fiduciaries they service a substantial amount of information, in writing. Information that must be disclosed includes a description of the services to be provided and all direct and indirect compensation to be receievd by the service provider (or its affiliates or subcontractors). Because certain services and costs are so significant and/or present the potential for a conflict of interest, information concerning those services and costs must be disclosed without regard to whether services are furnished as part of a bundle or package. Service providers must also disclose whether they are providing any services as a fiduciary to the plan. According to DOL, these new requirements will result in reduced time and cost for fiduciaries to obtain the compensation information needed to fulfill their fiduciary duties.

The full text of the interim regulation may be found at