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New Year – New Disclosure Requirements Beginning in 2012, Part II

Posted on February 20, 2012

Service Provider Disclosure Requirements

In addition to the participant disclosure requirements described in Part I the Department of Labor (“DOL”) has issued regulations relating to service provider contracts with retirement plans. Under the service provider rules, covered service providers must make certain disclosures to the plan fiduciary (the employer). These disclosures are intended to enable plan representatives to determine whether a service provider contract is reasonable requires that plan fiduciaries act prudently and solely in the interests of plan participants and beneficiaries. To discharge this obligation, the fiduciary must have information that will enable informed decision making. Importantly for both the service providers and the plan fiduciaries, the regulations are issued under the prohibited transaction rules. The service provider is a party in interest and also a disqualified person. The prohibited transaction rules create an exception for contracts that are reasonable, and provide services that are necessary for the establishment and operation of the plan at no more than reasonable compensation. The service provider fee disclosure regulations operate such that if the service provider does not make the disclosures, the contract will not be reasonable and would be a prohibited transaction. In addition, the responsible plan fiduciary (the employer) also engages in a prohibited transaction if the disclosures from the service provider do not comply with the regulations. This article provides a general review of the service provider fee disclosure regulations and the duties of the service providers and plan fiduciaries.

Timing. On February 3, 2012 the DOL released the final version of the regulations and set the effective dates. The initial service provider fee disclosures must be made by July 1, 2012 (versus the previously announced) April 1, 2012 date.

Plans Subject to the Rules. The new rules apply to all employee pension benefit plans and 403(b) subject to ERISA Title I. The new rules do not apply to governmental plans, deferral-only 403(b) plans exempt from ERISA Title I, SEP’s and simple IRA’s.

Service Providers. “A covered service provider” subject to the regulations is one that: (1) enters into a contract or arrangement (either written or unwritten); (2) reasonably expects to receive $1,000 or more in direct or indirect compensation during the term of the contract; and (3) provides services to the plan in one of the specific categories identified in the regulations. A service provider is a covered service provider even if the services are performed by an affiliate or a subcontractor.

“Service provider categories” include: (1) fiduciaries (e.g. trustees) or registered investment advisors receiving direct or indirect compensation; (2) platform record keepers and brokerage service providers receiving direct or indirect compensation; and (3) certain recipients of indirect compensation. “Fiduciaries” would include banks or mutual fund companies serving as trustee. “Platform recordkeeping” refers to services rendered to an individual account plan (e.g. profit-sharing, 401(k)) that permit participant direction of investment through designated investment alternatives (i.e. a list of selected mutual funds) in connection with the recordkeeping or brokerage services. Service providers who receive indirect compensation for services from specific categories of work are subject to the disclosure rules. The specific categories are: accounting, auditing, actuarial, appraisal, banking, consulting, custodial, insurance, investment advisory (for plan or participants), legal, recordkeeping, securities or other investment brokerage, third party administration or valuation services. Indirect compensation would include payments from revenue sharing with the mutual funds available for plan participant investment.

Required Disclosures. All service providers must provide:

  1. A description of the services provided to the plan;
  2. The service provider’s status as a fiduciary;
  3. A statement as to the direct and/or indirect compensation (e.g. fees or service charges or formula for indirect compensation) and whether the compensation may be derived from or paid to an affiliate or subcontractor;
  4. A description of any termination expenses;
  5. The manner in which the compensation is paid (e.g. plan is billed or participants’ accounts charged); and
  6. Certain investment disclosures described below.

In addition to the foregoing, record keepers must provide a description of all direct and indirect compensation and where the fees for recordkeeping are offset against or paid from other compensation services, (e.g. mutual fund fees) the service provider must estimate the value of the fees (e.g. based on amounts charged to other parties or the prevailing rate for the service). This would be applicable where a mutual fund company bundles the recordkeeping services together with a platform of mutual funds as designated investment alternatives.

Investment Disclosures. Platform record keepers and fiduciaries holding plan assets must make additional disclosures regarding investment alternatives. These investment disclosures require: a description of any compensation derived from the acquisition, sale or transfer of the investment (e.g. sales loads, surrender fees); annual operating expenses (e.g. mutual fund expense ratios); and any other expenses (e.g. wrap fees). A platform service provider may use information available from the investments’ prospectuses; provided however, that if the platform record keeper is an affiliate of the investment provider, then separate disclosures must be prepared.

Employer Responsibility. To avoid engaging in a prohibited transaction, the employer as plan administrator, must satisfy four conditions: (1) The plan administrator must not know that the covered service provider has failed or would fail to make the required disclosures and reasonably believed that the covered service provider disclosed the required information; (2) If the plan administrator discovers a failure it must make a written request to the covered service provider to correct the error; (3) If the covered service provider fails to correct the error within ninety (90) days of the request, the plan administrator must notify the DOL of the failure; and (4) The plan administrator must determine whether to continue the contract with the service provider.


Employer pays more than $1,000 to a third party administrator who renders only record keeping services, but not platform services. This is not a covered service and there is no required disclosure.

Employer or plan pays an auditor more than $1,000 for accounting or auditing services. These are not covered services and no disclosure is required.

ABC Bank is a trustee receiving compensation paid by the plan. The bank is a covered service provider and must make required disclosures.

Mutual Fund Company provides recordkeeping services at no extra charge either directly or through an affiliate entity. The mutual fund company must disclose the identity of the affiliate, if any, the direct and indirect fees, an estimate of the cost of the recordkeeping charges; and investment information with respect to each of the investment options.

Timing of Disclosures. The initial disclosures are required by July 1, 2012. Investment disclosures must be made no later than the date that the plan designates the investment as an available investment option. Changes must be disclosed as soon as practicable, but in any case, within sixty (60) days from the date the service provider is aware of the change. For new contracts, the information should be provided reasonably in advance of the contract being entered into.

David M.Mosier

David M. Mosier

David M. Mosier's practice includes business and tax transactions, retirement benefits, designing and drafting of employee pension and welfare benefit plans, and more.

dmosier@kmgslaw.com • 814-923-4878

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