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Client Alerts: Final Fee Disclosure Regulations

February 14, 2012 On February 3, 2012, the Department of Labor’s (“DOL”) Employee Benefits Security Administration (“EBSA”) published final regulations (29 CFR § 2550.408b-2) on required service provider fee disclosures to 401(k) and other retirement plan fiduciaries under section 408(b)(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). This final rule replaces and modifies the interim final rule which was published on July 16, 2010.

The final rule also delays the effective date of the rule from April 1 to July 1, 2012 and in turn delays the effective date for the related DOL mandated fee disclosures to participants in participant-directed individual account plans (29 CFR § 2550.404a-5) until August 30, 2012. Thus, for calendar year plans, the initial disclosure to participants must be provided by August 30, 2012, and the initial quarterly disclosure of fees and expenses charged to individual accounts must be provided by November 14, 2012.

Other than changing the effective date, the final rule on required service provider disclosure to plan fiduciaries also made a few substantive changes, which are summarized below: Covered Plan. The definition of covered plans subject to the final rule now excludes “frozen” annuity contracts and custodial accounts in 403(b) plans (i.e. contracts for which a plan sponsor ceased to have any obligation to make contributions and did cease making contributions, for periods before January 1, 2009) where the contract is fully vested and enforceable by the employee. Indirect Compensation.

The disclosure of “indirect compensation” (compensation received from a source other than the plan or plan sponsor) has been expanded to include both identification of the payer and a description of the arrangement between the payer and the covered service provider (“CSP”), affiliate or subcontractor pursuant to which the indirect compensation is paid. Aligning Regulations. The final rule modifies the information that must be provided by recordkeepers and others to 401(k) and other plan fiduciaries, so as to better align the disclosure with what is required in the participant-level disclosure regulation.

It also adds a requirement to disclose information that is necessary for the plan administrator to comply with the participant-level disclosure regulation if that information is within the control of (or reasonably available to) the CSP. Investment Disclosure - Recordkeeping and Brokerage Services. The final rule continues to require investment disclosures from CSPs of record keeping or brokerage services to an individual account plan that permits participants and beneficiaries to direct the investments of their accounts, if one or more designated investment alternatives are made available in connection with those services.

However, under the final rule, a CSP may comply by providing the directed investment account issuer’s current disclosure materials, or by providing information replicated from the issuer’s materials. The final rule focuses on whether the institution issuing the materials, not the materials themselves, is regulated. The designated investment alternative issuer must be (i) a registered investment company (a mutual fund), (ii) an insurance company qualified to do business in a state, (iii) an issuer of a publicly traded security, or (iv) a financial institution supervised by a state or federal agency. The CSP must act in good faith, must not know that the materials disclosed are incomplete or inaccurate and must provide the plan fiduciary with a statement that they are not making a representation as to the accuracy of the materials. Form of Disclosure.

The EBSA has reserved a place in the final rule for future guidance that would require a CSP to provide a guide or index or other specified format for disclosures. Until then, the EBSA has included a sample guide to initial disclosures in the appendix of the final rule. Timing of Disclosures. A CSP must now notify a plan fiduciary of changes to investment-related information at least annually. The 60-day deadline (required in the interim final rule) remains for changes to all other information the CSP previously disclosed. Further, upon the written request of the plan fiduciary or plan administrator, a CSP must furnish any other information relating to the compensation received in connection with a contract or arrangement that the covered plan needs to comply with ERISA reporting and disclosure requirements. The final rule changed the original rule slightly in that requested information generally must be furnished reasonably in advance of the date on which the responsible plan fiduciary or plan administrator states that it must comply with the applicable reporting and disclosure requirements (as opposed to the 60-day response deadline in the interim final rule). Compensation.

The final rule adds to and clarifies the definition of compensation. Compensation may be expressed as a monetary amount, formula, percentage of plan assets or a per capita charge for each participant or beneficiary. It also specifically permits a CSP to provide a “reasonable and good faith” estimate of compensation if it is not otherwise readily able to describe its compensation, as long as the CSP can explain the methodology and assumptions used to prepare the estimate. Plan Fiduciary Relief. A plan fiduciary has an exemption from certain prohibited transaction rules if the CSP fails to provide required disclosures so long as various requirements are met. The exemption originally stated that if the CSP failed to provide the information upon request, the plan fiduciary was required to consider whether to continue the relationship with the CSP. The final rule now requires a plan fiduciary to terminate the relationship if the CSP fails to provide requested information relating to future services. Even with the short delay in effective date, there is very limited time for plan fiduciaries to begin preparing to comply with the participant-level fee disclosure regulations.

That said, fiduciaries should begin preparing now to comply with the new rules. If you have any questions regarding the new fee disclosure rules or would like more information about how we can help, please contact one of the following attorneys, who are members of the Employee Benefits Team at BINGHAM GREENEBAUM DOLL LLP: Mary G. Eaves   (502) 587-3569   Benjamin J. Evans   (502) 587-3678

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