DOL finalizes provider-to-sponsor fee disclosure rules — highlights

DOL finalizes provider-to-sponsor fee disclosure rules -- highlights

In July 2010, the Department of Labor released an “interim final regulation” (hereafter, the “interim regulation”) under section 408(b)(2) of ERISA — the “service provider exemption” — providing a comprehensive and fully articulated set of rules governing provider-to-sponsor fee disclosure. Because of the significance of changes in the interim regulation from the (2007) proposed regulation, the regulation, while “final,” was also “interim.” Interested parties were invited to comment on the regulation, and it was understood that at some point DOL would issue a “final final” regulation.

On February 2, 2012 DOL released a “final final” 408(b)(2) regulation (hereafter, the “final regulation”). In this article we cover the key changes the final regulation made to the interim regulation. In a companion article we provide a comprehensive review of the final regulation.

Conformance of investment disclosure to sponsor-participant disclosure regulation

Probably the most significant change in the final regulation is a requirement that disclosure of investment expenses conform to the requirements of the final sponsor-participant disclosure regulation and that the service provider provide investment-related information it has (or has available) that the sponsor will need to discharge its participant fee disclosure obligations.

The interim regulation required only a description of operating expenses (e.g., the expense ratio) and other fees. The final regulation requires that the covered service provider provide:

A description of total annual operating expenses (e.g., expense ratio) expressed as a percentage and calculated in accordance with the sponsor-participant disclosure regulation.

For designated investment alternatives, any other information or data about the designated investment alternative that is within the control of, or reasonably available to, the covered service provider and that is required for the covered plan administrator to comply with the disclosure obligations under the sponsor-participant disclosure regulation.

In the preamble, DOL identified the following as additional investment information about a designated investment alternative (basically, any investment option in a fund menu – mutual funds, separate accounts, collective trusts, GICs – except for brokerage windows.):

Identifying information such as the name and type or category of the alternative.

Performance data.


Fee and expense information for alternatives with respect to which the return is fixed.

Web site data. In this regard, DOL stated in the preamble that, although the requirement to furnish an internet web site address falls on the covered plan’s administrator, the covered service provider may have within its control, or reasonably available to it, some of the data that must be provided at the web site address, such as the name of the investment alternative’s issuer; the alternative’s objectives or goals; the alternative’s principal strategies and principal risks; and the alternative’s portfolio turnover rate. The covered service provider would not be responsible for preparing the glossary.

With respect to concerns about increasing the service providers’ disclosure burden, DOL stated:

The Department does not intend to create a new or increased burden on a covered service provider, or require the covered service provider to obtain or prepare information that otherwise is not within the covered service provider’s control or reasonably available to the covered service provider. For example, in the case of a recordkeeper that offers a platform of designated investment alternatives consisting of mutual funds, the recordkeeper could satisfy its obligations under this provision by passing through to the covered plan the prospectuses for such funds, in view of the fact that such disclosures would contain much of the required information and be reasonably available to the recordkeeper (the covered service provider).

This new rule may raise issues for some providers. Generally, it should make sponsor compliance with participant disclosure obligations (marginally) easier.

Description of indirect compensation arrangement

Under the interim regulation, the covered service provider had to identify the services for which indirect compensation will be received and the payer of the indirect compensation. The final rule adds a requirement that the covered service provider “describe the arrangement between the payer and the covered service provider, an affiliate, or a subcontractor, as applicable, pursuant to which such indirect compensation is paid.” Explaining this provision, DOL stated:

The covered service provider must describe its arrangement with the payer of indirect compensation so that the responsible plan fiduciary can analyze why the payer, generally an unrelated third party, is compensating the covered service provider in connection with the covered service provider’s contract or arrangement with the covered plan. … The Department determined that the most effective way to achieve disclosure of conflicts of interest for purposes of the final rule is to inform plan fiduciaries of what compensation will be received and from whom. However, the Department also is persuaded that a responsible plan fiduciary would benefit from an explanation of the arrangement between the parties that gives rise to the indirect compensation paid in connection with the covered plan’s service contract or arrangement, and, accordingly, has provided for such a disclosure in the final rule.

Use of “ranges” to describe compensation

By way of clarification, in the preamble DOL stated a description of compensation using “ranges” (e.g., “from $1,000 – $2,000”) can be “reasonable” under certain circumstances. But DOL cautioned “that more specific, rather than less specific, compensation information is preferred whenever it can be furnished without undue burden.”

Annual disclosure of changes in investment information

Generally, changes in information must be disclosed within 60 days. Under the final regulation, changes in investment information (which under the interim regulation would have been subject to this 60 day rule) may be disclosed annually.

Termination of contract required after 90 days where there is noncompliance

The interim regulation provided that the responsible plan fiduciary, following discovery of a failure to disclose required information, had to determine (pursuant to applicable ERISA fiduciary rules) whether to terminate or continue the contract or arrangement. The final regulation adds a more rigid requirement (italicized language below):

If the covered service provider fails to comply with the plan fiduciary’s written request [for information the service provider is obligated, but has failed, to provide] within 90 days, the responsible plan fiduciary shall determine whether to terminate or continue the contract or arrangement consistent with its duty of prudence. If the requested information relates to future services and is not disclosed promptly after the end of the 90-day period, then the responsible plan fiduciary shall terminate the contract or arrangement as expeditiously as possible, consistent with such duty of prudence.


The preamble to the interim regulation solicited comments on whether a particular format for disclosure or the provision of a “summary” disclosure statement should be prescribed. DOL did not require a separate summary disclosure statement in the final rule. It did state that —

[I]n the near future, the Department intends to publish … a Notice of Proposed Rulemaking, under which covered service providers may be required to furnish a guide or similar tool along with the rule’s initial disclosures. For example, a proposed provision could require that, in addition to the information that must be disclosed pursuant to … the final rule (the initial disclosures), the covered service provider must separately furnish to the responsible plan fiduciary a guide that specifically identifies the document, section and page number where specified information, as applicable to the contract or arrangement, is located. Furnishing the guide as a separate document would ensure that the responsible plan fiduciary is aware of such document and can use it effectively in his or her review of the required disclosures. Alternatively, a regulatory provision could require some or all of the required disclosures to be included in a chart or similar summary format. … To further encourage service providers to assist plan fiduciaries in this manner, the Department is including a “sample guide” to initial disclosures as an appendix to the final rule.

Effective date

The interim regulation was to have been effective on July 16, 2011 — one year from publication in the Federal Register. That date was subsequently extended to April 1, 2012. The final regulation extends the effective date further, to July 1, 2012.

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The process of complying with new fee disclosure rules is going to be a difficult one, for providers and sponsors. While the final regulation increases (in some respects) the burdens on providers (and, arguably, makes sponsor compliance marginally easier), overall the best news is probably simply that we now have final rules. Hopefully the long and arduous process of reconfiguring how providers and sponsors capture and disclose information about fees is finished.