"On Being Reasonable: DOL’s Interim Final Fee Disclosure Rules"

On July 16, 2010, the Department of Labor released interim final rules (the 'final regulations') under Section 408(b)(2) of the Employee Retirement Income Security Act of 1974, as amended concerning disclosure in connection with services rendered to plans covered by ERISA. (135 PBD, 7/16/10; 37 BPR 1540, 7/20/10). Section 408(b)(2) requires that certain service provider arrangements with ERISA plans and related compensation be reasonable in order to be exempt from prohibited transactions under Section 406 of ERISA and analogous provisions of the Internal Revenue Code.

The final regulations provide that an arrangement will not be considered reasonable unless the service provider discloses certain fee and compensation information in writing to a responsible plan fiduciary (no matter whether the amount of compensation, absent such disclosure, would be considered by the plan fiduciary to be reasonable) and the arrangement will no longer qualify for Section 408(b)(2)'s statutory prohibited transaction exemption. In some instances, a service provider will need to disclose not only the services for which compensation is received, but also the payers and recipients of that compensation, and their status as affiliates or subcontractors of the service provider that contracts directly with the plan.

This article provides an overview of the final regulations, which will be effective as of July 16, 2011. This effective date will apply prospectively as well as to all then-existing arrangements. Accordingly, brokers, recordkeepers, investment advisers, consultants and other service providers to ERISA plans will, if subject to Section 408(b)(2), need to make such disclosure not only with respect to arrangements entered into on or after the effective date, but all covered arrangements regardless of when the arrangement was first entered into.