I know some big ERISA regulations are expected to be issued later this year. Where can I go for more information? — Anonymous in Bakersfield
The U.S. Department of Labor (DOL) plans to release its final regulations on proposed amendments to Section 408(b)(2) of ERISA, the Employee Retirement Income Security Act, later this summer. The new rules, expected to become effective in 2009, will shift the burden of demonstrating compliance with ERISA’s prohibited transaction rules from plan sponsors (employers) to service providers (investment advisors, pension consultants, etc.). Affected service providers that don’t comply with the disclosures relating to direct and indirect compensation and potential and actual conflicts of interest could face significant risk of legal liability and financial penalties.
To select a service provider, a plan sponsor (or its fiduciary delegate) must 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 before entering into an arrangement with the plan. This requirement is designed to give the plan sponsor time to evaluate the arrangement’s reasonableness. Consequently, plan sponsors should carefully document the process they undertake to make such a determination. The DOL has published a fact sheet with tips for selecting and monitoring service providers.
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An affected service provider must disclose all services given to the plan and whether it acts as an ERISA fiduciary1 with respect to delivering those services. It must also disclose all fees received in connection with the delivery of services. The DOL has issued guidance to assist plan sponsors with documenting fees charged by service providers; you can download a 401(k) Plan Fee Disclosure Form.
Although cost is one criterion for evaluating a service provider, other factors of equal or greater importance should be considered. For example, the proposed rules will require affected service providers to disclose all relationships or interests that raise conflicts, explain these arrangements, and describe any policies and procedures that address actual or potential conflicts. Again, the DOL provides guidance for plan sponsors in its publication “Selecting and Monitoring Pension Consultants—Tips for Plan Fiduciaries.”
If a service provider doesn’t meet its disclosure obligations, a plan sponsor is relieved from liability if the sponsor can demonstrate that it was unaware of the provider’s failure and reasonably believed the disclosure requirements were met. The plan sponsor, however, must take corrective action by issuing a written request for the missing information and must notify the DOL no later than 30 days following the earlier of: 1) the service provider’s refusal to furnish the requested information; or 2) the date which is 90 days after the date the written request is made.
The proposed rules contain a number of 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.
Jason Roberts, Esq., is a senior associate at the Hermosa Beach and New York offices of the law firm Edgerton & Weaver, LLP.
1 ERISA imposes a heightened standard of care for service providers that:
1) exercise discretionary authority over the management of a plan or the disposition of plan assets; 2) provide investment advice for a fee; or 3) exercise discretionary authority regarding plan administration.