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Regulatory: A prudent fiduciary’s response to the new ERISA disclosures

How to effectively comply with DOL regulations regarding Section 408(b)(2)

In order to avoid engaging in a prohibited transaction under the Employee Retirement Income Security Act (ERISA), fiduciaries of ERISA-covered plans must determine whether the compensation payable to plan service providers is “reasonable” within the meaning of Section 408(b)(2) of ERISA. Effective July 1, a new Department of Labor (DOL) regulation will provide that, in order for an arrangement between a “covered plan” and a “covered service provider” to be reasonable and therefore exempt from ERISA’s prohibited transaction penalties, specific disclosures of direct and indirect compensation must be made to the covered plan’s “responsible plan fiduciary” —a person with authority to cause the covered plan to enter into or extend or renew the service contract or arrangement. By now, every responsible plan fiduciary should have received these disclosures from every covered service provider to all of its covered plans. This article attempts to address what responsible plan fiduciaries should do with this deluge of disclosure in order to meet their fiduciary obligations under ERISA.

While the disclosure obligations are new, the reasonableness requirement is not. In the preamble to the regulation, the DOL stated that the disclosures are intended to provide information to assist plan fiduciaries in making this determination. The DOL also noted that it believed plan fiduciaries needed the information required by the regulation to satisfy their fiduciary obligations under Section 404(a)(1) of ERISA, which requires a fiduciary to discharge his or her fiduciary duties prudently and for the exclusive purpose of providing benefits to plan participants and defraying reasonable expenses of administering the plan. Because ERISA fiduciary compliance is largely procedural, an ERISA fiduciary’s best defense is his or her ability to document that the actions he or she took were those a prudent person in a similar situation would have undertaken. With this in mind, a responsible plan fiduciary should consider the following with respect to information received under the regulation:

  • The regulations do not require that the disclosures be in any particular format, and most covered service providers, in complying with the regulation, have provided guidelines that refer the responsible plan fiduciary to other documents and/or web sites. The responsible fiduciary should create a file for each covered service provider and include the 408(b)(2) guideline or other correspondence and every document referred to in the guideline. If the fiduciary references websites, he or she should include a screen shot of the applicable pages.
  • A paralegal or administrative assistant should review each document and tab and/or highlight the relevant sections cited by any guideline or correspondence. Ideally, he or she would develop a check sheet to document in a uniform format the compensation paid to similarly situated covered service providers.
  • The responsible plan fiduciary should schedule a meeting with the plan’s investment committee and/or council to review the new disclosures, particularly the disclosures relating to indirect and affiliate compensation and affirm that, upon their review, the disclosures meet the requirements of the regulation and the compensation is reasonable in light of the services provided.
  • If a responsible plan fiduciary reasonably believes that required disclosure may be missing, he or she should contact the  covered service provider in writing as soon as possible and request the missing information. If a covered service provider does not respond within 90 days of such request, the responsible plan fiduciary should consider terminating that arrangement (keeping in mind that if the requested information relates to future services, the responsible plan fiduciary is required to terminate the arrangement).
  • Responsible plan fiduciaries may find that the disclosures shed light on previously unknown aspects or components of the service provider arrangement. A responsible plan fiduciary should therefore compare its covered service providers’ compensation in light of the new disclosures, taking into account the nature of the services provided, the size of the particular investment, the range of services provided and other factors as appropriate to determine if the compensation payable to each service provider is reasonable. If a particular arrangement is off-market, plan fiduciaries may want to include additional notes in the file regarding why the arrangement is nonetheless reasonable in the circumstances. If a particular arrangement no longer appears “reasonable”, plan fiduciaries should consider renegotiating or terminating the arrangement.
  • With respect to contracts entered into on or after July 1, the responsible plan fiduciary should document his or her review of the 408(b)(2) disclosures and the reasonableness of the service provider’s compensation as part of the normal selection process. 

Contributing Author

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S. John Ryan

S. John Ryan is a partner in Seward & Kissel’s Employee Benefits Group. John advises a variety of clients concerning all aspects of employee benefits...

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Contributing Author

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Frank Mitchell

Frank Mitchell is an associate in the ERISA and Tax practice groups at Seward & Kissel in New York. 

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