New Disclosure Requirements for Service Providers to Retirement Plans

The U.S. Department of Labor (“DoL”) recently issued a regulation that requires certain service providers to retirement plans to disclose information relating to the services provided to those plans and the compensation received for those services.  The regulation relates to a fundamental rule under the Employee Retirement Income Security Act of 1974 (“ERISA”), or more accurately, an exception to the rule.  The rule, aimed at preventing abuses associated with retirement plan assets, is that a retirement plan may not engage in transactions with any “party in interest” with respect to the plan.  A “party in interest” is someone who has a relationship with the plan, such as trustees and service providers.  Because retirement plans usually require the services of outside parties (such as legal counsel, third party administrators, actuaries, investment advisers, etc.), an exception to the general prohibition was created to permit certain transactions with those parties.  The exception is that a service contract or arrangement between a service provider and a plan is not a prohibited transaction if the contract or arrangement is “reasonable,” the services are necessary for the operation of the plan, and no more than reasonable compensation is paid for the services.  That is where the regulation comes in.  It addresses what is a “reasonable” contract or arrangement (from the DoL’s perspective) by requiring disclosures by certain service providers with respect to services provided to a plan and the fees received for those services.

The regulation applies to defined contribution and defined benefit retirement plans.  It does not apply to IRAs, simplified employee pension plans (“SEPs”), or simple retirement accounts (“SIMPLEs”).

In addition, the regulation only applies to certain “covered service providers.”  Generally, a covered service provider (“CSP”) is a service provider that enters into a contract or arrangement with the plan under which the service provider reasonably expects to receive at least $1,000 in direct or indirect compensation from the plan (over the term of the contract or arrangement) in return for providing one or more covered services, regardless of whether the services will be performed (or the compensation received) directly by the CSP or by a “related party” (an affiliate or subcontractor of the CSP).  The three categories of covered services are as follows:

  • Services as a fiduciary or a registered investment advisor;
  • Certain recordkeeping and brokerage services (if designated investment alternatives are made available to plan participants in connection with the services); and
  • Other services (such as accounting, auditing, actuarial, appraisal, valuation, custodial, banking, legal, insurance, investment advisory, third party administration, recordkeeping, or consulting services) for which indirect compensation is received.

As you can see, the manner of compensating the service provider is important in determining if he, she, or it is a CSP.  Service providers in the third category above are not CSPs unless they receive “indirect compensation.”  Most service providers that receive “direct compensation,” that is, compensation paid directly from the plan to the service provider, are not CSPs.  Therefore, attorneys, accountants, and actuaries who send an invoice to the plan and are paid directly by the plan for services rendered are not CSPs who must provide the disclosures under the regulation.  Indirect compensation includes anything of monetary value, except for non-monetary compensation valued at $250 or less, that is not direct compensation.

Disclosures Relating to Services Provided

Once a service provider is determined to be a CSP, the regulation requires that the service provider must disclose to the plan, in writing, the following information relative to services to be provided to the plan by the CSP and/or related parties:

  • A description of each of the services provided to the plan under the organization’s contract or arrangement with the plan (the description must be in sufficient detail to permit the plan to assess whether the services are necessary for the operation of the plan and whether the compensation paid by the plan for the services is reasonable);
  • To the extent applicable, a statement that the CSP (or any related party) will provide services as a fiduciary (see definition below), a registered investment adviser, or both;
  • A description of all direct compensation reasonably expected to be received by the CSP and/or its related parties;
  • A description of all indirect compensation reasonably expected to be received by the CSP and/or its related parties, including identification of the services provided in connection with the indirect compensation and the payer of the indirect compensation;
  • A description of any direct or indirect compensation that will be paid among the CSP and its related parties if it is paid on a transaction basis or is charged directly against the Plan investment and is reflected in the net asset value of the investment (identifying the services for which compensation will be paid and the payers and recipients of such compensation, including the status of each payer or recipient as an affiliate or a subcontractor – compensation among related parties must be disclosed separately regardless of whether it is also disclosed as direct or indirect compensation or as part of investment disclosures);
  • A description of compensation reasonably expected to be received by the CSP or a related party in connection with the termination of a contract or arrangement (and how pre-paid amounts will be calculated and refunded); and
  • A description of the manner of receipt of the compensation (e.g., direct billing, deduction from accounts, or charge against investments).

Disclosures Relating to Investments

In addition to disclosures relating to services provided by the CSP and its related parties, a CSP must disclose information concerning compensation that relates to investments with respect to which the CSP or a related party is a fiduciary.  Parties in this category include record keepers, brokers, and certain investment fiduciaries.  These disclosures must be made regardless of whether the CSP have already disclosed that information in connection with services provided, as explained above).  These disclosures include:

  • The CSP must provide information about compensation reasonably expected to be received by the CSP and/or its related parties and all other compensation relating to the investment vehicle, including a description of any compensation that will be charged directly against the amount invested in connection with the acquisition, sale, transfer of, or withdrawal from the investment fund or product (e.g., sales loads, sales charges, deferred sales charges, redemption fees, surrender charges, exchange fees, amount fees, and purchase fees), a description of the annual operating expenses (e.g., expense ratio), and a description of any ongoing expenses (e.g., wrap fees, mortality, and expense fees); and
  • Fiduciaries to investment entities that hold plan assets, and record keepers or brokers that make investment vehicles available to participant-directed plans, must provide information about the fees and expenses associated with the plan’s investment alternatives, including fees charged directly or indirectly against amounts invested in an investment entity, including in some circumstances, a reasonable and good faith estimate of the cost to the plan of recordkeeping services.

Information concerning the CSP’s services and compensation must be disclosed without regard to whether the services are furnished as part of a bundle or package.  For example, the CSP must disclose whether it is providing recordkeeping services and the compensation attributable to such services, even when no explicit charge for recordkeeping is identified as part of the CSP’s contract or arrangement with the Plan.


The regulation requires that all CSPs make the necessary disclosures to the plan no later than July 16, 2011.  After that date each CSP will be required to again make updated disclosures reasonably in advance of the date that the contract or arrangement is to be extended or renewed.


The DoL regulation is extremely important to covered plans and all CSPs to those plans.  The plan fiduciaries have an obligation to obtain the required information from all CSPs in order to have a basis for evaluating whether the contract or arrangement with the CSP is reasonable.  If a CSP does not provide the information, the regulation provides relief to the plan if the plan notifies the DoL that a CSP did not properly disclose the information required by the regulation.  The plan must also indicate whether the CSP continues to provide services to the plan.  A CSP that does not provide the required information should not expect to continue to be a service provider to the plan.  If it does continue to provide services, it will be deemed to be engaging in a prohibited transaction with the plan.

Because of the importance of this new regulation, all covered retirement plans and service providers to those plans should discuss the disclosure requirements with legal counsel.  CSPs should take steps to understand the requirements under the regulation, gather all necessary information, and disclose that information to the plans to which they are providing services.  Each covered plan should develop a process for (a) identifying all CSPs, (b) notifying each CSP of its obligations under the regulation, (c) tracking all disclosures received (and all disclosures not received), (d) following up with CSPs that do not respond appropriately, (e) dealing with non-compliant CSPs, and (f) evaluating the information that is received by compliant CSPs.

July 16, 2011 is not far away.  All affected parties should be taking appropriate steps to ensure compliance with the new DoL requirements.

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