If you are a retirement plan fiduciary or service provider, you need to be aware of new DOL regulations that may subject you to excise taxes or breach of fiduciary duty claims. Under new Interim Final Regulations (referred to herein as the "new regulation"),1 many providers of services to retirement plans will have to provide specific disclosures regarding their compensation and fee arrangements, and plan fiduciaries will have to ensure that they do so. Failure to comply will constitute engaging in a prohibited transaction under ERISA Section 406 and Section 4975 of the Internal Revenue Code. The service provider may be subject to excise taxes and the fiduciary who caused the retirement plan to retain a service provider who fails to make the required disclosures may be liable for a breach of fiduciary duty under ERISA.
The current rule. Services provided to an employee benefit plan are covered by ERISA's and the IRS's "prohibited transaction" provisions, unless:
But what does "reasonable" mean? Current regulations are unclear, saying only that a contract or arrangement is not reasonable unless it permits the plan to terminate the contract or arrangement without penalty on reasonably short notice.
The new regulation. This "reasonableness" question is the heart of the new regulation. Now, in order for a contract or arrangement with a covered service provider to be deemed "reasonable," the covered service provider must disclose certain information about its compensation to the fiduciary who has the authority to cause the employee benefit plan to enter into, extend or renew the contract or arrangement. Failure to do so will render the agreement between the plan and the service provider a "prohibited transaction." The service provider may be subject to excise taxes, and the plan fiduciary may be deemed to have breached its fiduciary duty by not ensuring that the service provider complied.
Who is a "covered service provider"? The new regulation imposes disclosure obligations (described below) on the following service providers who expect to receive compensation of $1,000 or more (defined in the new regulation as "covered service providers"):
What must be disclosed? Covered service providers must disclose:
The required disclosures must be made prior to entering, renewing or extending a contract or arrangement with a covered plan. The covered service provider must also inform the plan fiduciary of any changes to the required disclosures as soon as practicable but no later than 60 days from the date of a change.
What if the Required Disclosures are not made? As noted above, a service provider's failure to make the required disclosures carries consequences for both the provider and the plan's fiduciary.
When is the new regulation effective? The new regulation will apply to all service contracts or arrangements between covered plans and service providers on or after July 16, 2011, including existing contracts and arrangements entered into prior to that date. The new regulation covers only defined contribution and defined benefit plans. Individual retirement accounts, simplified employee pension plans and welfare plans are not covered.
What to do now. Since the new regulation will now apply to contracts and arrangements entered into, renewed or extended prior to the effective date of July 16, 2011, plan fiduciaries should identify their covered service providers and assess what additional information will be required. In order to monitor ongoing compliance with the new regulation, plan fiduciaries should also develop procedures for monitoring and reviewing the disclosures being made by covered service providers.
This alert is one in a series on the topic of ERISA and employee benefits. To read past alerts, please click here. For more information on this alert or other ERISA matters, please contact:
(1) As discussed in this alert, the interim final regulations do not apply to welfare plans. The DOL has reserved space in DOL Regulation §2550.408b-2 where it intends to develop disclosure requirements specifically tailored to welfare plans.
(2) For purposes of the new regulation, indirect compensation is generally compensation from a source other than the covered plan, the plan sponsor, a covered service provider or an affiliate.
Copyright © 2010 Herrick, Feinstein LLP. ERISA Alert is published by Herrick, Feinstein LLP for information purposes only. Nothing contained herein is intended to serve as legal advice or counsel or as an opinion of the firm.