SPECIAL ALERT: Final Rule on 408(b)(2) has Finally Arrived

On February 3, 2012, eighteen months after announcing an interim final rule, the Department of Labor (“DOL”) published a final rule (“Final Rule”) adopting disclosure requirements for retirement plan service providers under Section 408(b)(2) of the Employee Retirement Income Security Act of 1974 (“ERISA”). The Final Rule requires “covered service providers” to disclose certain information to plan fiduciaries in order for a contract or arrangement with the provider to the plan to be “reasonable” within the meaning of ERISA section 408(b)(2) and, therefore, satisfy that statutory exemption from ERISA’s prohibited transaction rules. Responsible plan fiduciaries of “covered plans” must ensure all “covered service provider” contracts and arrangements comply with the disclosure requirements of the Final Rule by the July 1, 2012, effective date.

The Final Rule supersedes and, in a few respects, differs from the interim final rule (discussed in detail in our July 2010 issue). In addition to delaying the compliance effective date until July 1, 2012, the DOL introduced the following key substantive additions and changes:

  • Code section 403(b) annuity contracts or custodial accounts issued before January 1, 2009, to which the employer has ceased making contributions (and no longer has an obligation to make contributions) in which the employee is fully vested, and can enforce the rights and benefits of the contract or account against the insurer or custodian without employer involvement are not subject to the disclosure requirements of the Final Rule.
  • A service provider receiving indirect compensation must describe the service provider’s relationship with the payee along with a disclosure of the amount of indirect compensation received.
  • Investment-related information in the Final Rule for participant-directed individual account plans that are subject to the participant-level disclosures regulation is conformed to the requirements of the participant-level disclosures regulation. For example, for an investment that is a designated investment alternative, the covered service provider must provide any information that is within its control or reasonably available to it that is required for the covered plan administrator to comply with its own disclosure obligations under the participant-level disclosures regulation.
  • Investment related service providers, including those providing recordkeeping and brokerage services, may now satisfy the requirements of investment-related disclosures by providing current disclosure materials of the investment issuer (such as a mutual fund prospectus), as long as the issuer is not affiliated with the covered service provider, and is:
    • a registered investment company;
    • an insurance company qualified to do business in a state;
    • an issuer of a publicly-traded security; or
    • a financial institution supervised by a state or federal agency.

    The covered service provider must provide the responsible plan fiduciary with a statement that the covered service provider is making no representations as to the completeness or accuracy of such materials, but must act in good faith and must not know that the materials are incomplete or inaccurate.

  • Changes related to investment information must be disclosed on at least an annual basis.

Plan sponsors should begin working now to determine whether the plans they sponsor are “covered plans” within the meaning of the Final Rule and, if so, whether the plan’s contracts and arrangements with “covered service providers” satisfy the disclosure requirements of the Final Rule. It is the responsibility of the plan fiduciary to ensure compliance with the Final Rule as a part of its fiduciary obligations when selecting and monitoring service providers. Where the plan fiduciary determines that a service provider contract or arrangement does not satisfy the requirements of the Final Rule, the plan fiduciary must request in writing that the service provider provide the required information. If the service provider fails or refuses to provide such information upon request, the plan fiduciary must promptly consider termination of the contract or arrangement for failure to provide information necessary for the relationship to be deemed “reasonable” within the meaning of ERISA section 408(b)(2). To obtain an exemption from the prohibited transaction rules, in light of the service provider’s failure to provide the required information, the plan fiduciary must first notify the DOL of the failure within 30 days following the earlier of the service provider’s refusal to furnish the requested information or the date that is 90 days after the date the plan fiduciary requests the information.

Provided below is a checklist to help plan sponsors determine whether they are the sponsor of a “covered plan” within the meaning of the final rule and, if so, who is a “covered service provider” to the plan, and what the “covered service provider” under a current contract or arrangement must disclose by July 1, 2012, in order for the contract or arrangement to satisfy the statutory exemption from the prohibited transaction rules for a “reasonable” service arrangement under ERISA section 408(b)(2).

If you answered NO, the Plan is not a covered plan subject to the Final Rule under section 408(b)(2), and you need read no further. If YES, continue.

If you answered YES to either question two or three, the Plan is not a covered plan subject to the Final Rule under section 408(b)(2), and you need read no further.

If you answered NO to both questions two and three, the plan is a covered plan, and the plan fiduciary must obtain required disclosures from all covered service providers.

If you answered NO to all questions one through five, the service provider is not a covered service provider under the Final Rule, and the remainder of the questionnaire does not apply to that provider. If you answered YES to any question one through five, continue.

If you answered YES to either item six or seven, the service provider is not a covered service provider under the Final Rule, and the remainder of the questionnaire does not apply to that provider. If you answered NO to both items six and seven, continue.

If you answered YES to this question eight, the service provider is a covered service provider, and must provide timely and adequate disclosures, as discussed below, to comply with the Final Regulation.

If you answered NO to this question eight, the service provider is not a covered service provider under the final rule, and no disclosure is necessary.

 

If the answer to each of the questions in Section III is either YES or N/A, the plan fiduciary has received sufficient information under the Final Rule with regard to the covered service provider.

If the answer to any of the questions in Section III is NO, the information provided by the covered service provider is not sufficient, and the plan fiduciary must issue a written request for the covered service provider to supply the missing information. If the covered service provider fails or refuses to provide such information within 90 days of a request, the plan fiduciary must promptly consider termination of the contract or arrangement for failure to provide information necessary for the relationship to be “reasonable” within the meaning of ERISA section 408(b)(2). In addition, the plan fiduciary must report the covered service provider to the DOL for failing to provide the requested information before the plan fiduciary can obtain an exemption from applicable prohibited transaction rules. Given that the compliance deadline is July 1, 2012, plan fiduciaries should move quickly to review covered service provider contracts and arrangements in order to provide non-compliant covered service providers with notice and a request for information at least 90 days before July 1.

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Notes

1 A “designated investment alternative” is any investment alternative designated by a fiduciary into which participants may direct the investment of their individual accounts, and does not include brokerage windows, self-directed brokerage accounts or similar arrangements that allow participants to select investments beyond those specifically designated.

2 Consulting services include development or implementation of investment policies or objectives, or the selection and monitoring of service providers or plan investments.

3 Investment advisory services may be for the plan or for the plan’s participants.

4 An “affiliate” includes any party that directly or indirectly controls, is controlled by, or is under common control with a covered service provider. A subcontractor is a party that is not an affiliate of the covered service provider and that, pursuant to a contract or arrangement with the covered service provider or an affiliate of the covered service provider, reasonably expects to receive $1,000 or more in compensation for performing one or more covered services.

5 Compensation may be disclosed as a monetary amount, formula, percentage of the covered plan’s assets or a per capita charge for each participant or beneficiary. If compensation cannot reasonably be described by any of these methods, it may be described by any reasonable good faith estimate, provided that the service provider explains the methodology and assumptions used to prepare the estimate.