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Department of Labor Adopts New Disclosure Rules for Plan Service Providers

Department of Labor Adopts New Disclosure Rules for Plan Service Providers
August 11, 2010

The U.S. Department of Labor has issued rule amendments imposing new disclosure requirements on investment advisers and other service providers to ERISA-covered employee benefits plans ("plans"). The amended rule, which will become effective on July 16, 2011, expands the types of information service providers are required to furnish to the plans they serve. The new disclosures will be necessary in order for service providers to avoid violating ERISA's prohibited transaction provisions.

Section 408(b)(2) of ERISA exempts arrangements between plans and service providers that otherwise would be prohibited transactions under section 406 of ERISA. It provides relief for service contracts or arrangements if (1) the services provided are necessary for the establishment or operation of the plan, (2) no more than reasonable compensation is paid for the services, and (3) the contract or arrangement is reasonable. Regulations issued by the Department of Labor clarify each of these conditions to the exemption.

The new regulation amends the rules under ERISA section 408(b)(2) to clarify the meaning of a "reasonable" contract or arrangement for covered plans. In order for certain contracts or arrangements for services to be reasonable, the covered service provider must disclose specified information to a plan fiduciary under the new rule.

Service Providers Covered Under the Amended Rule

The amended rule applies to any service provider seeking to rely on the section 408(b)(2) exemption that enters into a contract or arrangement with a plan, reasonably expects to receive more than $1,000 in direct or indirect compensation, and falls within one of the following categories:

  • ERISA fiduciaries or registered investment advisers, including state- and SEC-registered investment advisers that provide services directly to a plan.
  • Providers of recordkeeping or brokerage services to a participant-directed individual account plan.
  • Providers of other services for indirect compensation. These services include accounting, auditing, actuarial, appraisal, banking, consulting, custodial, insurance, investment advisory, legal, recordkeeping, brokerage, third party administration or valuation services provided to a plan when the service provider reasonably expects to receive "indirect" compensation or certain payments from related parties.

If the service provider does not fall under one of the categories described above, it would not be covered under the amended rule and would not be subject to the new disclosure requirements. Nevertheless, service contracts that fall outside the scope of the amended rule still must be "reasonable" for ERISA section 408(b)(2) to apply.

Disclosure Requirements

The amended rule requires a covered service provider to disclose in writing the following information to a plan fiduciary (additional requirements apply to certain service providers):

  • Description. The service provider must furnish a description of the services to be provided to the plan. The description must provide sufficient detail for the fiduciary to determine whether the compensation received is reasonable.
  • The service provider's status and relationship to the plan. The service provider must disclose its relationship to the plan: it must state whether it is an investment adviser to the plan, an investment vehicle covered under the amended rule or an ERISA fiduciary.
  • The compensation the service provider reasonably expects to receive. The service provider must describe all direct and indirect compensation it reasonably expects to receive in connection with the services it provides to the plan. This includes compensation among related parties if the compensation is set on a transaction basis or is charged directly against the covered plan's investment and reflected in the net value of the investment (e.g., 12b-1 fees). Additionally, compensation received in connection with the termination of the contract must be disclosed.
  • Manner of receipt. The service provider must describe how it will receive its compensation.

Timing of Disclosure
While the rule does not prescribe any style or format the written disclosures must take, it does impose time requirements for when the disclosures must be made.

  • The disclosures required by the amended rule must be provided to the plan fiduciary "reasonably in advance of" the date the arrangement is entered into, extended or renewed.
  • The service provider must also disclose any change to the required information within 60 days from the date on which the service provider is made aware of the change.
  • The service provider must provide any other information related to compensation required for the plan to comply with its reporting and disclosure duties within 30 days of a written request made by the plan fiduciary.

Please do not hesitate to contact a member of Godfrey & Kahn's Investment Management Team if you have any questions regarding the amended rule.

Media Contact 

If you have a media request or need an attorney with particular knowledge for comment, please contact Susan Steberl, Director of Marketing, at 414.287.9556 or ssteberl@gklaw.com.

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