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Department of Labor Issues Final 408(b)(2) Regulation2月 3, 2012
On February 2, 2012, the Department of Labor issued a final regulation requiring that a fiduciary retaining a plan service provider obtain detailed information concerning the service provider’s fees and services in order to qualify for an exemption to ERISA’s prohibited transaction rules under ERISA § 408(b)(2). The final rule replaces an interim final rule issued on July 16, 2010, and will become effective July 1, 2012. Although the final rule retains many of the same requirements as the interim final rule, there are a number of key changes.
One significant change is a new requirement in the final rule that, in arrangements where recordkeeping services will be provided, in whole or in part, without explicit compensation, or where the explicit or direct costs to a plan for recordkeeping services may be offset or rebated based on indirect compensation received by the record keeper or its affiliates from third parties, the service provider must provide the retaining fiduciary, at the beginning of the service relationship, “a reasonable and good faith estimate of the cost to the covered plan of such recordkeeping services, including an explanation of the methodology and assumptions used to prepare the estimate and a detailed explanation of the recordkeeping services that will be provided to the covered plan.” The requirement is notable because, although service providers were already required to disclose the amount of indirect compensation under the interim final rule, the rule provided them considerable flexibility to disclose such information in dollar figures, as a percentage of assets, or by some other formula. The added requirement, however, implicitly requires that all compensation for recordkeeping be calculated in a similar manner. This is illustrated by the common example of a service provider that charges a 401(k) plan a set dollar amount for recordkeeping services, but offsets that dollar amount by any asset-based fees the service provider receives from the plan’s investment options. In order to estimate the cost of its recordkeeping services to the plan, the service provider would need to calculate the dollar amount of the offset and thus the dollar value of those asset-based fees. The actual dollar value of the asset-based fees, however, may depend greatly on factors—such as market performance and the allocation of participant assets among investment options—that are beyond the service provider’s control or ability to predict. Because the requirement itself suggests the Department’s view that the estimate is material to plan decision-making, fiduciaries will likely face challenging questions as to how they should respond when a service provider’s advance estimate proves materially inaccurate.
Another notable change is a requirement in the final rule that, in addition to requiring the disclosure of indirect compensation that the service provider receives from third parties, a service provider must supply a description of the arrangements between it and third-party payers “pursuant to which such indirect compensation is paid.” In commentary to the final rule, the Department stated that this additional requirement is intended to allow the retaining fiduciary to analyze why third-party payers are compensating the service provider in connection with the service provider’s arrangement with the plan. Both the regulation and commentary, however, discuss the requirement in fairly general terms, leaving considerable room for debate as to how far the descriptions must go when, for example, the payments to a service provider in connection with a particular plan are part of much broader commercial relationship between the service provider and the third-party payer.
Other differences between the interim final rule and final rule include the exclusion from the rule’s requirements of certain annuity contracts and custodial accounts described in Section 403(b) of the Internal Revenue Code; alteration of the time frame within which changes in investment information must be disclosed; and adjustments to service provider disclosures to better align them with the fee disclosures plan administrators must provide plan participants. The Department’s summary of these and other changes is available at http://www.dol.gov/ebsa/408b2changes.html. The final regulation is available at http://www.dol.gov/ebsa/pdf/2012-02262-PI1.pdf, and the Department’s fact sheet is at http://www.dol.gov/ebsa/newsroom/fs408b2finalreg.html.
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