DOL Issues Fee Disclosure Regulation for Service Providers to ERISA Retirement Plans

On July 16, 2010, the Department of Labor (“DOL”) issued an interim final regulation (PDF)¹ that requires service providers to disclose specific information to sponsors of ERISA retirement plans. The required information relates to the services performed and the fees and expenses that the providers receive. The regulation’s aim is to make it easier for plan fiduciaries (e.g., plan sponsors and administrators) to understand the compensation paid to their providers and to highlight potential conflicts of interest that may affect performance.

The regulation takes effect on July 16, 2011.

The material below provides you with a quick overview of the final regulation, a link to a more complete description and some questions and answers on specific topics.

OVERVIEW
The final regulation implements and interprets ERISA Sec. 408(b)(2). It essentially provides that the covered service provider must disclose specific information to the responsible fiduciary for the covered retirement plan about the services to be performed for the plan and the compensation to be received for those services.

• Covered Plans: Generally, defined contribution and defined benefit retirement plans covered by ERISA.
• Covered Service Providers: Persons who reasonably expect to receive $1,000 or more in compensation in connection with providing services to a plan.
• Required Disclosures-Format and Content: No specified format; must be written. Required content includes: descriptions of the services to be provided, the compensation to be received, and how it is to be received.
• Timing of Disclosure: Current contracts-before July 16, 2011. New contracts-reasonably in advance of start date. Changes-no later than 60 days after provider informed of change.
• Requirements for Plan Fiduciaries: Must ensure that disclosures are provided, check them, and request missing information. If information not provided, must notify DOL.

This final regulation is part of a broader initiative by the DOL covering the types of fees service providers must report to plan sponsors and plan participants.

• The first part of this initiative was the publication by DOL of new reporting requirements for Schedule C (“Service Provider Information”) of the Form 5500 that were first effective for the 2009 plan year reports.
• This interim final regulation is the second part of the initiative, covering fees and other disclosures required from service providers to plan fiduciaries.
• A third part of the initiative addresses required disclosures to plan participants under defined contribution plans (final regulations are expected in fall 2010).

WHAT TIAA-CREF IS DOING TO MEET THE NEW REQUIREMENTS
We have been following the legislative and regulatory processes relating to provider disclosure to both plan sponsors and participants from their inception, and have consistently provided comments and input during these processes that reflect the interests of the organizations and people that we serve. During the same period, we have also been readying internal resources to enable us to fully comply with the regulatory changes relating to Form 5500 disclosures, the current regulation, and the forthcoming regulations on disclosures to participants. TIAA-CREF will, as always, be ready to timely provide the necessary services and guidance to our clients so that they are fully ready to meet their fiduciary obligations.

LEARN MORE ABOUT THE SPECIFICS OF THE REGULATION

IF YOU HAVE QUESTIONS
For answers to some frequently-asked questions on the final regulations, see the Q&A section below. If you need more information about the final regulation or how it may affect you and your retirement plans, please contact your Managing Consultant. If you are served exclusively by the Administrator Telephone Center, please call 888 842-7782, 8 a.m. to 8 p.m. (ET), Monday through Friday. Our consultants will be happy to help you.

SOME QUESTIONS AND ANSWERS ON THE FINAL REGULATION

The final regulation is an “interim” one: What does that mean?
The final regulation includes substantial changes from the original proposed regulation and the DOL has requested comments on it no later than August 30, 2010. The regulation is called “interim” because of the potential for revisions. However, because the DOL has said that the regulation is final, it is not expected that any further amendments will result in substantial changes.

When is the final regulation effective?
It will be effective on July 16, 2011.

What is a “covered plan” under the final regulation?
Covered plans include both ERISA-covered defined contribution plans (i.e., 401(a)/(k), and 403(b) plans) and defined benefit plans (i.e., 401(a) plans). The final regulation does not apply to governmental or non-electing church plans and it does not apply to IRAs or annuities.

Who is a “covered service provider” under the final regulation?
Covered service providers are limited to persons who reasonably expect to receive $1,000 or more in direct and indirect compensation in connection with providing services to a plan. The new requirements generally apply to three categories of providers:

• Fiduciaries or Investment Advisers
• Record keepers and Brokers
• Service providers receiving “indirect compensation”

TIAA could be a covered service provider under each of these categories.

What disclosures does the interim final regulation generally require?
A covered service provider must generally provide:

• A description of the services to be provided;
• A statement as to whether the service provider will provide the services as an ERISA fiduciary or as a registered investment adviser;
• A description of all direct and indirect compensation reasonably expected to be received; and
• A description of the manner in which the compensation will be received.

Is there any specific format for the disclosure information?
The regulation requires only the written disclosure of the required information and that the disclosures must be made to the responsible plan fiduciary. No particular provisions are currently required, although the DOL may provide further guidance on this issue at a later point.

When are the disclosures required to be made?
For outstanding contracts or arrangements in effect now, the disclosures must be made by July 16, 2011, the effective date of the final regulation.

• For new arrangements, disclosures generally must be made reasonably in advance of the date the contract or arrangement is entered into, extended or renewed.
• A change to the information required in the initial disclosure must be disclosed no later than 60 days from the date the provider is informed of the change.

When TIAA-CREF is acting as the recordkeeper for a plan, are there any special disclosures required?
Yes. A service provider acting as a recordkeeper must provide a description of the direct and indirect compensation that it expects to receive for recordkeeping services. Additionally, recordkeepers who make available “designated investment alternatives” (defined below) must also provide basic fee information for each designated investment alternative, in addition to the information regarding the recordkeeper’s own compensation.

What is “compensation” under the regulation?
“Compensation” is broadly defined to include money or any other thing of monetary value (gifts, etc.), but does not include non-monetary compensation valued at $250 or less in the aggregate during the term of the contract or arrangement.

• "Direct compensation” is compensation received directly from the plan.
• "Indirect compensation” is compensation received from any source other than the plan, the plan sponsor, or an affiliate or subcontractor in connection with the service arrangement.
• Compensation paid directly by the plan sponsor is not covered by the final regulation and requires no disclosures.

What is a “designated investment alternative”?
A “designated investment alternative” is any investment alternative designated by a plan fiduciary into which participants and beneficiaries may direct the investment of assets in their accounts. Brokerage windows or accounts are not, for purposes of these disclosures, “designated investment alternatives.”

Does the final regulation impose any requirements on “responsible plan fiduciaries”²?
The disclosure requirements of the final regulation are generally a service provider obligation. The responsible plan fiduciary is generally responsible only for ensuring that the service provider supplies the required disclosures, for checking them, and for requesting any missing information from the provider in writing. If the provider fails to supply the missing information, the fiduciary must then notify the DOL to avoid violating ERISA’s prohibited transaction rules.

How will TIAA-CREF keep us informed about future developments in this area?
We will keep you informed with ongoing updates and disclosures required for new ERISA-covered plans, both on the TIAA-CREF Plan Sponsor website and in our plan sponsor communications, and we will share more details of our disclosure services with you during the coming months.