Labor & Employment Advisory
Published by Howard & Howard Attorneys PLLC

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March 30,  2012

Thank you for taking the time to read this Howard & Howard Labor & Employment Advisory.  We are pleased to provide our clients and friends with periodic updates on issues, industry developments, and regulatory changes to help you address the changing challenges facing employers.  As always, if you have any questions, please feel free to contact any of the
Howard & Howard Labor, Employment, and Immigration Group 


Employers that sponsor qualified retirement plans must prepare to comply with new fee disclosure rules over the course of the next few months. These complex rules promulgated under proposed final Regulations issued by the Department of Labor last year and finalized last month are subject to implementation in two stages. The first stage requires fee and service disclosure by plan service providers to plan sponsors by July 1, 2012. The second stage requires plan sponsors to disclose plan related fees to plan participants by August 30, 2012. This Advisory will focus on the disclosure by service providers to plan sponsors. A subsequent Advisory will summarize the fee disclosure rules for plan participants.

  • What Plans are covered by the rules?

The disclosure rules apply to compensation paid by qualified retirement plans that are subject to the Employee Retirement Income Security Act of 1974 ("ERISA"), including 401(k) plans, profit sharing plans, ESOP's, cash balance plans and defined benefit pension plans. The rules do not apply to IRA's, simple plans, SEP's or welfare benefit plans. Note, the rules do not apply to plan related fees paid by plan sponsors.

  • Who must make disclosure to a Plan?

A plan service provider that expects to receive more than $1,000 of direct or indirect compensation or fees from the plan in connection with the performance of certain services (regardless of whether the services are performed by the provider, an affiliate or a subcontractor) is subject to the disclosure rules and considered a "covered service provider." The provision of the following services will cause a provider to be subject to the disclosure rules: (1) services as plan fiduciary or registered investment advisors, (2) plan recordkeeping or brokerage services provided to participant directed account plans that make at least one investment alternative available, and (3) accounting, auditing, appraisal, custodial or consulting services if the provider, or an affiliate or subcontractor of the provider, receives indirect compensation from the plan.


Direct compensation and fees will generally be obvious. For example, the fee charge to plan participants by a third party administrator for processing loan requests or distributions is a direct fee. The source of indirect fees is decidedly more complicated and it is these types of fees that are in the crosshairs of the disclosure rules. All compensation received from any source other than the plan is considered indirect compensation for purposes of the disclosure rules. A common example of indirect fees would be 12b-1 mutual fund expenses that are shared with a plan service provider through an affiliate or other arrangement. Depending upon the nature of the plan and related circumstances, disclosure will generally be required by a plan's third party administrator, custodian, investment advisor and/or recordkeeper.

  • What is required to be disclosed?

Covered service providers must provide the plan with a detailed description of the services to be provided under its contract or arrangement with the plan and the direct and indirect compensation the provider, affiliate or subcontractor expects to receive in connection with the provision of such services. With respect to indirect compensation, the provider must identify the payer and provide a description of the arrangement between the payer and the provider under which the indirect compensation is paid. This disclosure is intended to assist plan sponsors with identifying conflicts of interest amount providers and payers and to better analyze indirect compensation arrangements. If the required information is unknown at the time of the disclosure, a general description that is sufficient to allow the plan sponsor to evaluate the reasonableness of the compensation is acceptable. Where compensation is shared by related parties, the provider must describe the services to be provided with respect to the related party compensation and identify the payers and recipients of the compensation.


The disclosure must also include a description of any compensation due in connection with the termination of the service agreement, including how any prepaid amounts will be refunded and the calculation of such refund. In the event the provider expects to serve as a plan fiduciary, the disclosure must confirm the provider's status as a fiduciary.


The final Regulations expanded the disclosure obligations related to participant directed investment alternatives so as to be consistent with the plan sponsor's disclosure obligation to participants. In this regard, recordkeepers and brokerage firms that provide fiduciary services to individual account plans, e.g. investment advisors, that permit participants to direct the investment of account balances must make the following additional disclosures with respect to the investment alternatives made available under the plan:

  • A description of the compensation that will be charged directly against an investment alternative, e.g., sales load and redemption fees;
  • A description of the total annual operating expenses expressed as a percentage and calculated in accordance with the participant-level disclosure rules; and
  • Any other information available to the service provider with respect to an investment alternative that is necessary in connection with the plan sponsor's required participant-level fee disclosures.

Subject to certain limitations, a service provider may generally comply with these additional disclosures by providing the current disclosure materials produced by the issuer of the investment alternative, or information replicated from such materials, that includes the required information.


A service provider's description of compensation or costs must generally be expressed in dollars, a formula, a percentage of the plan's assets or a per capita charge. In the event the service provider cannot reasonably describe the specific compensation or cost, a good faith estimate of such compensation or cost is acceptable but only if the service provider explains the methodology and the assumptions used in calculating the estimate. Any description must contain sufficient detail to allow the plan sponsor to determine if the compensation or cost is reasonable.


Current service agreements are likely to reflect some level of detail related to the services to be provided and the fees to be charged. If compliant with the rules, additional disclosures may not be necessary. In such event, plan sponsors should receive confirmation from the provider that compliant disclosure of services and fees in accordance with the rules is provided in the current agreement.

  • Additional disclosure by plan recordkeepers.

If a service provider is providing recordkeeping services and if the fees for such services may be paid indirectly or through offsets or rebates from an affiliate, the service provider must provide a reasonable good faith estimate of the total cost to the plan of the recordkeeping services, including an estimate of any compensation or fees received by the recordkeeper under revenue sharing arrangements with affiliates.  This estimate must include an explanation of the methodology and assumptions used to prepare the estimate and a detailed explanation of the recordkeeping services provided to the plan. This disclosure may be one of the most important elements of the rules. Based on this disclosure, employers should know the total compensation received by a recordkeeper with respect to services rendered on behalf of the plan without having to piece together fees from several sources. Employers may be surprised by the total compensation paid to plan service providers that will be revealed in connection with this disclosure.

  • When must disclosure be made to an employer/plan sponsor?

The effective date for disclosure by plan service providers was extended by the final Regulations to July 1, 2012. Previously, disclosure was to be made by April 1, 2012. Disclosure must also be made reasonably in advance of the date a service agreement is first effective, extended or renewed. Any change to the compensation, fees or services must be disclosed as soon as practicable, but no later than 60 days after the provider first becomes aware of a change, unless extraordinary circumstances beyond the provider's control prevents timely disclosure. Iin part, this is intended to give plan sponsors the opportunity to engage an alternative service provider in the event the sponsor objects to a fee increase. Any change related to investment related information must be disclosed at least annually. The service provider must also disclose upon the plan sponsor's written request any information related to compensation and costs that is required for the sponsor to comply with the reporting and disclosure rules as applicable to the plan sponsor, e.g. Schedule C to Form 5500 and participant-level disclosures, reasonably in advance of the date the plan sponsor must comply with such rules, unless such disclosure is precluded by extraordinary circumstances beyond the provider's control.

  • What are the plan sponsor's obligations with respect to disclosure by a service provider?

The rules do not spare plan sponsors from responsibility with respect to compliance by service providers. In the event a service provider fails to fulfill any of it disclosure requirements, the plan sponsor must make a written request for compliant disclosure from the provider upon the sponsor's discovery of the provider's failure. If the service provider fails to respond in a compliant fashion within 90 days of the sponsor's request or the provider refuses to furnish compliant information, the plan sponsor must notify the Department of Labor in writing of the provider's failure to comply. The sponsor's notice to the Department must include detailed information regarding the plan, the plan sponsor, the plan fiduciaries, the service provider, a description of the information that was not disclosed, the date such information was requested from the provider and a statement as to whether the provider continues to perform services for the plan. In connection with this process, the plan sponsor must determine whether to terminate its relationship with the provider, which determination, as the rules point out, is a fiduciary decision and must be based on an evaluation of the circumstances surrounding the provider's failure and those associated with replacing the provider. Needless to say, a written record of this determination is essential. In the event the failure relates to future services and the information is not disclosed promptly following the expiration of the 90-day period following the sponsor's request, the sponsor must terminate the contract.

  • What are the consequences for failure to comply with the rules?

Plan service providers are considered "interested parties" for purposes of ERISA's rules regarding prohibited transactions. Generally, agreements between an interested party and a plan will be considered prohibited for this purpose. An exception exists with respect to services provided to a plan if the compensation received is considered reasonable. In accordance with the disclosure rules, service provider compensation for purposes of the prohibited transaction rules will not be considered reasonable if the provider fails to comply with the disclosure rules. In such event, the arrangement with the provider will be considered a prohibited transaction and expose both the plan sponsor and the provider to significant penalties.

  • What action should employers be taking now?

The recent extension of the effective date provided service providers and plan sponsors some breathing room to comply with the disclosure rules. Regardless, plan sponsors should be in contact with plan service providers regarding the providers' intended timeline with respect to compliance with the rules.

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In This Issue
Fee Disclosure Rules for Qualified Retirement Plans
About Howard & Howard
Attorney Spotlight
Bob Johnston
Robert B. Johnston
is a Member of Howard & Howard Attorneys PLLC and specializes in employee benefits, ERISA and executive compensation matters.
Attorney Spotlight
Joseph B. Hemker is a Member of Howard & Howard Attorneys PLLC and specializes in corporate, M&A and strategic planning matters for financial institutions.
Attorney Spotlight
Michael J. Powers
Michael J. Powers is a Member of Howard & Howard Attorneys PLLC and specializes in employee benefits, ERISA and executive compensation matters.
This Advisory is intended for informational purposes only, and is not offered as legal advice.  Please call a qualified attorney for counsel related to your particular situation.