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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:

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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