Questions from Plan Sponsors Re 408(b)(2)
What are the New Disclosure/Reporting Requirements for ERISA Plan Service Providers and Where Can I go for Help in Evaluating the Disclosures?
The Department of Labor (DoL) is expected to release its final regulations on proposed amendments to ERISA §408(b)(2) later this summer. The new regulations, which are expected to become effective January 1, 2009, will shift the burden of providing documentation demonstrating compliance with ERISA’s prohibited transaction rules from plan sponsors to service providers. Affected service providers that fail to comply with the exhaustive disclosures relating to direct/indirect compensation and potential/actual conflicts of interest could face significant risk of legal liability as well as financial penalties.
The DoL has provided a mechanism that exempts plan sponsors from liability associated with the prohibited transaction that is conditioned upon documentation of the basis for the engagement. Selecting a service provider requires the responsible plan fiduciary to evaluate and differentiate services offered by competing companies. The new rules will require affected service providers to have written agreements with plan sponsors that disclose all of their compensation and any conflicts of interest prior to entering into an engagement with the plan. This requirement is designed to give the plan sponsor time to evaluate the reasonableness of the arrangement. Consequently, plan fiduciaries should carefully document the process undertaken to make such a determination. The DoL has published a “Fact Sheet” containing tips for selecting and monitoring service providers available at http://www.dol.gov/ebsa/newsroom/fs052505.html.
An affected service provider must disclose all services provided to the plan and whether it is acting as a fiduciary with respect to the delivery of those services. It must also disclose any and all fees received in connection therewith. The DoL has issued guidance to assist plan fiduciaries with documenting fees charged by service providers. The 401(k) Plan Disclosure Form is available at http://www.dol.gov/ebsa/pdf/401kfefm.pdf.
While cost is once of the criteria for evaluating a service provider, other factors of equal or greater importance should be considered. Conflicts of interest, for example, should be reviewed and documented. The proposed rules will require affected service providers to disclose any and all relationships or interests that raise conflicts, describe such arrangements and describe any policies and procedures that address actual or potential conflicts. Again, the DoL has issued guidance for plan sponsors in this regard. “Selecting and Monitoring Pension Consultants – Tips for Plan Fiduciaries” is available at http://www.dol.gov/ebsa/newsroom/fs053105.html.
As discussed, plan sponsors are relieved from liability if a service provider fails to meet its disclosure obligations to the extent they can demonstrate that they were unaware of the provider’s failure and reasonably believed the disclosure requirements had been met. The plan sponsor must also take corrective action by requesting the missing information and notifying the DoL of any provider’s failure to deliver the requested disclosures within a specified time.
Indeed, the proposed rules contain numbers specific requirements for documentation and notice. Plan sponsors should begin familiarizing themselves with the new requirements so they can develop policies and procedures for documenting and assessing contracts with existing and prospective service providers.
The Department of Labor (DoL) is expected to release its final regulations on proposed amendments to ERISA §408(b)(2) later this summer. The new regulations, which are expected to become effective January 1, 2009, will shift the burden of providing documentation demonstrating compliance with ERISA’s prohibited transaction rules from plan sponsors to service providers. Affected service providers that fail to comply with the exhaustive disclosures relating to direct/indirect compensation and potential/actual conflicts of interest could face significant risk of legal liability as well as financial penalties.
The DoL has provided a mechanism that exempts plan sponsors from liability associated with the prohibited transaction that is conditioned upon documentation of the basis for the engagement. Selecting a service provider requires the responsible plan fiduciary to evaluate and differentiate services offered by competing companies. The new rules will require affected service providers to have written agreements with plan sponsors that disclose all of their compensation and any conflicts of interest prior to entering into an engagement with the plan. This requirement is designed to give the plan sponsor time to evaluate the reasonableness of the arrangement. Consequently, plan fiduciaries should carefully document the process undertaken to make such a determination. The DoL has published a “Fact Sheet” containing tips for selecting and monitoring service providers available at http://www.dol.gov/ebsa/newsroom/fs052505.html.
An affected service provider must disclose all services provided to the plan and whether it is acting as a fiduciary with respect to the delivery of those services. It must also disclose any and all fees received in connection therewith. The DoL has issued guidance to assist plan fiduciaries with documenting fees charged by service providers. The 401(k) Plan Disclosure Form is available at http://www.dol.gov/ebsa/pdf/401kfefm.pdf.
While cost is once of the criteria for evaluating a service provider, other factors of equal or greater importance should be considered. Conflicts of interest, for example, should be reviewed and documented. The proposed rules will require affected service providers to disclose any and all relationships or interests that raise conflicts, describe such arrangements and describe any policies and procedures that address actual or potential conflicts. Again, the DoL has issued guidance for plan sponsors in this regard. “Selecting and Monitoring Pension Consultants – Tips for Plan Fiduciaries” is available at http://www.dol.gov/ebsa/newsroom/fs053105.html.
As discussed, plan sponsors are relieved from liability if a service provider fails to meet its disclosure obligations to the extent they can demonstrate that they were unaware of the provider’s failure and reasonably believed the disclosure requirements had been met. The plan sponsor must also take corrective action by requesting the missing information and notifying the DoL of any provider’s failure to deliver the requested disclosures within a specified time.
Indeed, the proposed rules contain numbers specific requirements for documentation and notice. Plan sponsors should begin familiarizing themselves with the new requirements so they can develop policies and procedures for documenting and assessing contracts with existing and prospective service providers.
posted by Jason C. Roberts, Esq. at
9:06 PM
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