Service providers in the US will be required to disclose any direct and indirect compensation to plan fiduciaries from July 16, 2011, under new regulations issued by the Department of Labour.
The US Department of Labour’s (DOL) Interim Final Regulation (IFR), issued last July, will enable plan fiduciaries to receive the information they need to make meaningful evaluations of the fees paid by their plans and plan participants.
The IFR requires existing contracts to disclose compensation by the July date, with new or renewed contracts after this date being disclosed before they are entered into and mid-contract changes within 60 days from the date the provider is aware of the change.
The rule comes after concerns were expressed by the DOL, Congress and the retirement industry over the lack of information provided to plan fiduciaries regarding their service providers’ complex compensation structures, making it difficult for these fiduciaries to comply with their fiduciary obligation to determine if fees are reasonable, and if any compensation arrangements involve conflicts of interest.
The rule is part of the DOL’s three-pronged program to address its concern regarding inadequate fee disclosure.
Plan fiduciaries will need to take the following steps to meet the July deadline:
1. Identify all retirement plan service providers
2. Request in writing the necessary information from each service provider
3. Determine whether the service providers are “covered service providers”
4. Follow up any covered service providers who do not provide the necessary information
5. Evaluate the information received to assess the reasonableness of fees, potential conflicts of interest and other issues that may be revealed
6. Document in meeting minutes in the second and third quarters of 2011 that the regulation’s requirements have been met
7. Repeat annually – or at the time of contract changes if sooner
From the July deadline, plan fiduciaries who do not receive the required disclosures will have engaged in a prohibited transaction. However, due to the prohibited transaction exemption, plan fiduciaries will be relieved of any liability if they:
1. request the necessary information in writing from the provider
2. notify the DOL if the required information is not provided within 90 days, and
3. formally evaluate whether the plan should continue to do business with the service provider.
In other DOL news, the department has issued proposed rules requiring additional disclosure on Qualified Default Investment Alternatives (QDIAs).
These proposed rules are aimed at making plan participants more aware of the asset allocations of the various age-based strategies, and how they will change over time; of the specific current age range targeted for the respective target retirement dates and any assumptions made about the participant’s contributions and withdrawals after the target date; and that the participant and their beneficiaries may incur losses and the age-based strategy does not guarantee that there will be sufficient assets for retirement on the target date.
Similar changes have also been proposed for the original QDIA regulations and corresponding requirements have been proposed for the participant fee disclosure rules when individual account plans offer target date or similar investment alternatives.