On July 16, 2010 the Department of Labor (DOL) issued an interim final rule on fee disclosure in 401(k) and other retirement plans. The new regulation (referred to as the 408(b)(2) regulation) is intended to help plan fiduciaries to better understand the compensation paid to plan providers, and to help to highlight any conflicts of interest that may affect a provider’s performance under a service contract or arrangement. The interim final rule will take effect on July 16, 2011.

An interim final rule means that the public has a short period to make comments—in this case 45 days from the July 16 issuance date. Although public comments are invited, the regulations are essentially in final form, but may be modified after additional comments are received. The interim final rule replaces proposed rules, issued in 2007, but never finalized.

Under the interim final rule, a covered service provider (CSP) must disclose in writing the following information to a responsible plan fiduciary:

• A description of the services to be provided by the CSP;
• A statement by the CSP identifying the services for which compensation will be paid, as well as the identity of the payers and recipients;
• A statement, if applicable, indicating whether the CSP will provide any services as a fiduciary or as a registered investment advisor;
• A description of all direct and indirect compensation reasonably expected to be received;
• A description of how compensation will be paid among related parties, such as whether it will be set based on transactions (e.g. ,commissions, soft dollars, finder’s fees) or charged directly against the plan’s investments and reflected in the investment net value (e.g., Rule 12b-1 fees).
• A description of any compensation that the CSP, an affiliate or a subcontractor reasonably expects to receive in connection with termination of the contract or arrangement, and how any prepaid amounts will be calculated and refunded upon such termination; and
• A description of the manner in which compensation will be received, such as whether the plan will be billed directly to the plan sponsor or whether the compensation will be deducted directly from plan accounts or investments.
  Relative to the 2007 proposed rules, the new disclosure regime has been streamlined. However, the interim final rule includes a new requirement that fees for recordkeeping services must be separately disclosed, even when recordkeeping is provided as part of a bundled package of services. Financial services firms offering bundled service solutions lobbied hard to avoid having to disclose recordkeeping fees, but the DOL decided to add this requirement, based on input from organizations such as ASPPA, and consultants including Schultz Collins Lawson Chambers, Inc. (SCLC).

Phyllis Borzi, assistant secretary for the DOL’s Employee Benefits Security Administration, explained the rationale behind the rule as follows: “Improving disclosure will mean that plan fiduciaries can make more informed decisions about important plan services, the cost of the services and the potential conflicts of interests that their service providers may have.”

SCLC supports this new DOL initiative, and looks forward to helping our clients review their plan service agreements to see whether they comply with the new 408(b)(2) requirements. We are planning a client webinar for October 5 to review this regulation. While DOL has allowed a reasonable time frame—one year from publication of the rules—to implement the new requirements, the 408(b)(2) requirements impact virtually every service agreement for virtually every retirement plan in the United States, there is lots of work to be done between now and July 16, 2011.

Please feel free to contact us if you have any immediate questions regarding these new rules.

The entire final proposed regulation can be read here