Thursday, December 13, 2007

DOL Proposed Regulation - Reasonable Contract or Arrangement Under Section 408(b)(2)--Fee Disclosure

29 CFR Part 2550

RIN 1210-AB08

DOL Proposed Regulation - Reasonable Contract or Arrangement Under Section 408(b)(2)--Fee Disclosure

According to a news release, the U.S. Labor Department is proposing regulations to increase the disclosure of fees and conflict of interests affecting 401(k) and other employee benefit plans:

"Washington – The U.S. Department of Labor today announced a proposed rule that will enhance disclosure to fiduciaries of 401(k) and other employee benefit plans to assist them in determining the reasonableness of compensation paid to plan service providers and conflicts of interest that may affect a service provider's performance under a service contract or arrangement.

"One of the department's top priorities is improved disclosure in order to ensure that participants and fiduciaries have the information they need to make informed decisions," said U.S. Secretary of Labor Elaine L. Chao. "We are working quickly to implement regulations that foster fair, competitive and transparent prices for services as well as combat excessive or hidden plan fees."

The proposed regulation would enhance disclosure to plan fiduciaries by requiring that contracts between certain service providers and plans provide for specific and detailed information. The proposal requires that all services furnished to a plan and all compensation, direct and indirect, to be received by the service provider be disclosed in writing. The proposal also requires the disclosure of possible conflicts of interest of the service provider that may affect the performance of plan services.

In addition, the department is proposing a class exemption to provide relief to plan fiduciaries who enter into deficient contracts with service providers that, unbeknownst to the plan fiduciary, failed to comply with their disclosure obligations.

401(k) savings and other employee benefit plans are critical to the retirement and health security of American workers and their families," said Bradford P. Campbell, assistant secretary for the Labor Department's Employee Benefits Security Administration. "This initiative enhances disclosure of fees and conflicts of interest that can affect workers' interests and is an important part of our continued efforts to enhance workers' benefit security.""

The fact sheet describes the following disclosure requirements:

"Disclosure of Services and Compensation - The terms of the contract must require that the service provider disclose information regarding all services to be performed and all compensation that will be received either directly from the plan or indirectly from parties other than the plan or plan sponsor. The proposal includes a definition of "compensation or fees" and rules for bundled service providers and for estimating the amount of prospective compensation.

Disclosure of Conflicts of Interest - Service providers also must disclose information about relationships or interests that may raise conflicts of interest for the service provider in performing plan services. Specifically, service providers must describe:

  • any participation or interest of the service provider in transactions to be entered into by the plan pursuant to the contract;
  • any material relationships with other parties that may create conflicts of interest;
  • any compensation the service provider may receive that it can affect without prior approval by an independent fiduciary; and
  • any policies or procedures in place to address potential conflicts of interest.
Ongoing Disclosure Obligations - The proposal includes ongoing disclosure obligations relating to:
  • Material Changes: During the term of the contract, a service provider must disclose material changes to information previously furnished within 30 days of such changes.
  • Reporting and Disclosure Requirements: Service providers must disclose compensation or other information related to the contract or arrangement that is requested by the responsible plan fiduciary or plan administrator in order to comply with ERISA's reporting and disclosure requirements.
  • Actual Performance: The proposal also includes an explicit requirement that service providers actually make the required disclosures."

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