DOL Issues New Regulation Imposing Fee Disclosure Rules on Service Providers to ERISA Retirement Plans

The U.S. Department of Labor ("DOL") published an interim final regulation on July 16, 2010 (the "Regulation") that expands the disclosure obligations that service providers must satisfy in order to qualify for the exemption for service contracts or arrangements between a plan and a party in interest under Section 408(b)(2) of ERISA (and the corresponding provisions of the Internal Revenue Code). Section 408(b)(2) of ERISA exempts such contracts or arrangements if the contract or arrangement is reasonable, the services are necessary for the establishment or operation of the plan, and no more than reasonable compensation is paid for the services (the "Service Exemption"). While not all contracts or arrangements may need to comply with the Service Exemption, it is common for such contracts or arrangements to do so and it is required where the service provider provides multiple services to a plan. This new Regulation is intended to assist plan fiduciaries in assessing the reasonableness of contracts or arrangements, including the reasonableness of a service provider's compensation and potential conflicts of interest that may affect a service provider's performance.

Effective Date/Comment Period

In view of the importance of the Regulation and the potentially significant effects that it may have on plan fiduciaries and service providers, the DOL published the Regulation as an "interim final regulation" and requested further comments by August 30, 2010. The Regulation is effective as of July 16, 2011 (one year from its publication).

Covered Service Providers

The Regulation only applies to service providers to retirement plans (such as a 401(k) plan or profit sharing plan subject to ERISA). It uses the term "covered plan" to refer to these plans. The Regulation does not cover arrangements for health and welfare benefit plans, nor does the Regulation cover arrangements between service providers and IRAs (or simplified employee plans or SIMPLE plans).

In general, a service provider is a "covered service provider" subject to the Regulation if it enters into a contract or arrangement with a covered plan and reasonably expects $1,000 or more in direct or indirect compensation to be received in connection with providing one or more of the following services:

Services as a fiduciary or registered investment adviser. Services provided directly to the covered plan as a fiduciary, services provided as a fiduciary to a "plan assets" vehicle and in which the covered plan has a direct equity investment or services provided directly to the covered plan as a registered investment adviser. A direct equity investment does not include investments made by the plan assets vehicle in which the covered plan invests, thus there is no "look through" to second tier investment vehicles. Certain plan recordkeeping or brokerage services. Recordkeeping services or brokerage services provided to a participant-directed retirement plan that is an individual account plan (such as a "401(k) plan") and that permits participants to direct the investment of their accounts, if one or more designated investment alternatives1 will be made available (e.g. through a platform or similar mechanism) in connection with such recordkeeping services or brokerage services. Other...

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