Jul 16, 2010

DOL Issues Retirement Plan Fee Disclosure Interim Final Regulation

On July 15, the Department of Labor’s Employee Benefits Security Administration released the long-awaited Interim Final Regulations on fee disclosure for retirement plans (the “Regulations”). These Regulations, which will be effective on July 16, 2011, require “service providers” to disclose all direct and indirect compensation related to the services that they are providing to retirement plans. Service providers covered by the Regulations generally include fiduciaries, registered investment advisors, certain record-keepers and brokerage service providers, as well as other service providers who receive indirect compensation.

As a reminder, the Employee Retirement Income Security Act of 1974 (“ERISA”) requires plan fiduciaries to act prudently and solely in the interest of plan participants and beneficiaries when selecting and monitoring service providers and plan investments. This means that plan fiduciaries must ensure that the arrangements with, and the compensation paid to, their service providers are reasonable. To make such informed decisions, plan fiduciaries need information from their service providers, which historically has been hard to acquire. These new disclosure Regulations should aid plan fiduciaries in receiving the information that they need in order to assess the reasonableness of the fees that are being paid from plan assets and in determining potential conflicts of interest that may affect the service provider’s performance.

ERISA also requires plan fiduciaries to act with the care, skill, prudence, and diligence, under the then-prevailing circumstances, of a prudent person acting in a similar situation who is familiar with such matters. It is the plan fiduciary’s decision-making process and the prudence of such process that will be analyzed in determining whether such fiduciary acted prudently–not the resulting decision. This means that plan fiduciaries should review the fee information that they receive from their service providers with their advisors and document their decision-making process.

Recent litigation as to the reasonableness of fees being paid from plan assets is a reminder of how important it is for plan fiduciaries, especially investment committees, to meet regularly with their investment advisors and review the performance of their plan’s investments, as well as the fees being paid from plan assets. For example, the U.S. District Court for the Central District of California, in an excessive fee lawsuit, recently ruled that Southern California Edison and its plan fiduciaries violated the duty of prudence by not properly investigating the differences between selecting retail shares versus institutional shares. According to the court, the failure of the defendants to investigate the lower costs of institutional shares cost the plan’s participants unnecessary fees.

The Fact Sheet can be obtained by clicking here.

For more information, please contact your SGR Executive Compensation and Employee Benefits counsel.


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