ERISA Service Provider Disclosures: What Plan Sponsors Need To Do Now

Author:Mr Frederick Reish, Joan M. Neri, Joshua J. Waldbeser and Bruce L. Ashton
Profession:Drinker Biddle & Reath LLP

July 1 was a watershed date in the ERISA world. By that date, covered service providers to ERISA-governed retirement plans1 had to provide written disclosures about their services, fiduciary status and compensation to the "responsible plan fiduciary" for all their existing plan clients. Failure to do so made their service arrangements prohibited transactions under ERISA.

We have passed that deadline, and the focus now shifts from the providers to plan sponsors.2 So now what? This Bulletin describes the steps that plan sponsors must take to review the disclosures they received, and how to proceed appropriately in cases where the disclosures were not furnished. This is important because, if a plan sponsor fails to engage in a prudent process to evaluate disclosures provided by a service provider, or fails to identify required disclosures that are missing or deficient and take affirmative action, it will have engaged in a breach of fiduciary duty and, possibly, a prohibited transaction.

Key Considerations for Plan Sponsors:

Required disclosures vary significantly depending on the services provided and the sources of the provider's compensation; therefore, the plan sponsor may need to engage an attorney or consultant to evaluate the completeness of the disclosure. If required information was not provided by July 1, 2012, specific procedures must be timely undertaken in order to avoid engaging in a fiduciary breach and, possibly, a prohibited transaction, and in some cases the arrangement may need to be terminated. The plan sponsor must evaluate the disclosures and may need to renegotiate the contract or terminate it in order to avoid engaging in a fiduciary breach. Background

The final service provider disclosure regulation extended the compliance effective date from April 1, 2012 to July 1, 2012 and made certain other changes. (For information on the impact on plan sponsors of the prior "interim final" regulation, see our October 2011 bulletin at: service-provider-disclosures-the-impact-on-plan-sponsors.pdf.)

The final regulation was issued under ERISA Section 408(b)(2), which provides an exemption for "reasonable" contracts and arrangements for plan services that would otherwise be prohibited transactions. The exemption is not new – plan fiduciaries have always had a duty to enter into "reasonable" service arrangements. What has changed is that the final regulation states that no contract or arrangement with a "covered" service provider will be reasonable unless the required disclosures are furnished. It also makes clear that a failure by the plan sponsor to take the actions prescribed by the regulation if the disclosure requirements are not satisfied will result in a fiduciary breach and, possibly, a prohibited transaction.

The disclosure must be made by "covered" service providers to the plan and must include detailed information about services, compensation and whether the provider is an ERISA fiduciary and/or an investment adviser registered under the Investment Advisers Act of 1940 or state law (an "RIA"). The disclosure is intended to provide plan sponsors with the information needed to make prudent judgments, as fiduciaries, as to the reasonableness of service arrangements.0 Plan sponsors can also use the information to complete Schedule C of the Plan annual return (Form 5500), which generally requires plans that covered 100 or more participants at the beginning of the plan year to report information about all service providers that received $5,000 or more in direct and indirect compensation during that year.

To fully appreciate the steps required of plan sponsors, it is important to understand how the...

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