The quickly approaching deadline for written fee disclosures by covered service providers creates new homework for plan sponsors–in the form of enhanced fiduciary review obligations and a suggested need to review (and/or create) written service agreements.

By now folks who work in the tax-qualified retirement industry are well (and perhaps painfully) aware that the United States Department of Labor (“DOL”) issued final service provider fee disclosure regulations early this year.  As the deadline for service providers to provide the required disclosures (i.e., July 1, 2012) draws close, it seems like an opportune time to consider what plan sponsors should do with this all this data, and what other steps they should consider taking.  The DOL has said that the purpose of the disclosures is to enable plan fiduciaries to better understand the range and value of the services received from providers and to better measure the reasonableness of the compensation (direct and indirect) received by the service providers.  So how should plan sponsors actually go about doing that?

Without going into great detail on the disclosure requirements (we are aware most readers have spent significant time reviewing a number of detailed summaries of the disclosure regulations and so will spare you that agony here), the final service provider fee disclosure regulations require service providers to describe in writing all services performed by them on behalf of the plan and to disclose and generally describe in writing all compensation, both direct and indirect, to be received by them in return for services.

As an aside, plan sponsors of participant directed individual account plans also face a looming deadline to provide to participants detailed plan fee information.  Again, the range of information to be disclosed to those participants is beyond the scope of this blog entry, and has been the topic of numerous summaries.  However, some of the information to be provided to affected participants logically will be drawn from the material provided to the plan sponsors by the service providers (and presumably many plan sponsors will rely on service providers in preparing the participant disclosures).  The earliest deadline for providing this information is August 30, 2012, and quarterly and annual update requirements apply.  New participants must be provided this information before they are able to begin investment direction.  Any failure to comply with the participant disclosure requirements could be treated as a fiduciary breach under ERISA. 

With July 1, 2012 right around the corner, it’s logical to ask what a responsible plan sponsor is supposed to do with all this new (or at least newly repackaged) information.  The most important thing is that plan sponsors must realize that mere receipt of the fee information by the plan sponsor is not enough.  In fact, we would argue the opposite is true.  The fiduciary duties imposed on a plan sponsor under ERISA compel that sponsor to evaluate the disclosures and to determine the reasonableness of all fees.  Plan sponsors will have to review fees disclosures thoroughly and consider making service relationship changes if they determine that fees being assessed are too high.  Under ERISA, as now constructed, the plan sponsor will have engaged in a prohibited transaction if a covered service provider fails to provide the required disclosures (thus inviting the imposition of excise taxes and other dollar penalties under ERISA).  This clearly places a heightened burden of diligence on the plan sponsor.  Some observers expect there might be some surprises in these disclosures, particularly with respect to the source and amount of indirect compensation.  Plan sponsors also will have to decide whether to review those disclosures on their own or to hire advisers to assist in that review, and they (and their agents) will have to be vigilant.

The failure of a covered service provider to adequately disclose necessary information always will be a risk.  It is important to note that the regulations provide limited relief to a plan sponsor in the event of such a failure only in certain circumstances.  First, the plan sponsor must not know that the service provider failed (or would fail) to comply with the disclosure rules and must reasonably believe that the service provider disclosed the necessary information (for this purpose, the plan sponsor or its agents should review the disclosures made, and compare the disclosures made to the disclosure requirements in the regulations in order to establish that reasonable belief).  Second, if the plan sponsor discovers a service provider has failed to disclose required information, then the plan sponsor must request in writing the missing data from the service provider.  If, upon such a request, the service provider refuses to provide the information or fails to do so within ninety (90) days of the request, then the plan sponsor must notify the DOL of the service provider’s refusal or failure (that notice to the DOL must be made not later than 30 days following the earlier of the date on which the service provider refuses to provide the missing information or the date that is 90 days after the plan sponsor’s request for the missing information was made).  If a service provider fails to provide the missing information within ninety (90) days of the plan  sponsor’s request, then the plan sponsor must determine whether to terminate or continue the contract or arrangement (if the missing information relates to future services, then generally the plan sponsor must terminate the service arrangement as quickly as possible).

In addition to completing the all important fiduciary review referenced above, plan sponsors are well advised to review their service agreements to ensure they are in material compliance with the disclosure regulations.  This also is a good opportunity to identify and contact all of the covered service providers that provide services to each plan sponsor’s plan(s).  Areas in service agreements that might require tweaking include the termination provisions (as noted above, plan sponsors must be free to terminate these agreements quickly if the service providers fail to satisfy the fee disclosure requirements) and provisions dealing with fee schedule changes.  It is worth noting that nothing in ERISA previously required these service agreements to be in writing, and that conclusion is not changed by the issuance of these new regulations (although the required disclosures themselves must be in writing).  However, it generally makes sense to reduce the agreements to writing so that both parties can better understand the expectations and obligations imposed on them and therefore better satisfy those obligations.  Now that the consequences of failing to satisfy the fee disclosure requirements can be dire, plan sponsors are particularly well advised to add provisions in written service agreements that afford to them levels of additional protection in the event service providers fail to satisfy the fee disclosure requirements (such an by adding contractual claims for recovery and/or indemnification provisions).