PLANSPONSOR - November 2011

DISCLOSURE CLOSURE

Plan sponsors have long been tasked with ensuring that the fees paid by and services rendered to their plans are reasonable. It has not, however, always been easy for them to ascertain the details necessary for them to fulfill their fiduciary responsibilities. In recent months, the Department of Labor (DoL) has issued regulations that could have a significant impact on the amount and consistency of information available. PLANSPONSOR recently met with Larry Goldbrum, General Counsel and Executive Vice President, The SPARK Institute, and John Guido, Division Vice President, ADP Retirement Services, to discuss these trends and the implications for plan sponsors.

PS: Why did the Department of Labor issue these new
disclosure rules?

Goldbrum: Some plan sponsors have reported that they were either unable to get the information they needed or that they just didn’t know what to ask for and, at the same time, vendors technically did not have an affirmative obligation to disclose their fees. These were concerns for the DoL.

PS: Will these new rules help?

Guido: Absolutely. I think that the legislation is a good idea. Providing a consumer—in this case, the plan sponsor or the participant—a concise way of determining what their fees are is a great idea. It’s important to remember that the fee disclosure document covered service providers will give to plan sponsors is really about helping them assess the value of their retirement plan: Do they have a program in place that is best enabling their employees to achieve retirement readiness at a reasonable cost?

PS: What does §408(b)( 2) have to do with fee disclosure? Goldbrum: 408(b)( 2) is the section of ERISA that allows retirement plans to hire and pay vendors to provide services. A plan is allowed to make reasonable arrangements for necessary services if no more than reasonable compensation is paid. The new rules will require vendors to make specific disclosures in order for the contract to even be considered reasonable. That is how the Department of Labor was able to establish an affirmative obligation for vendors to make the disclosures.

PS: Which service providers in particular are required to
comply with these new rules?

Goldbrum: The rule creates a new term called a “covered service provider,” which is anyone who provides specified services to an ERISA-covered plan that expects to be paid $1,000 or more, either directly or indirectly from the plan. The definition encompasses a very broad definition of services.

PS: What has ADP been doing to prepare for these new
rules?

Guido: ADP historically has been very forthcoming in our
disclosure of fees, as well as the description of services and
revenue-sharing arrangements. We’re tracking closely the
progress of the new regulations to make sure we remain in
compliance and continue to work with our partners, both
third-party administrators and the adviser community, to
see how it would affect the plan sponsor. We’ve also been
in active communication with our plan sponsor clients to
help them prepare. It’s critical that they understand what’s
happening from a legislative perspective and that we’re
making sure that our plan sponsor clients are in the loop
with the new regulations.

PS: What responsibilities will plan sponsors have under
these new rules, and what should they be doing to be
prepared?

Goldbrum: What John said is very important: Communication, at this point, between plan sponsors and their service providers is going to be key. One of the things that plan sponsors need to start doing is decide what they are going to do with the disclosures they receive. Plan sponsors are going to have to evaluate the information and determine that the services that they’re receiving are necessary and the fees are reasonable. Those aren’t new obligations, but plan sponsors can expect to receive a lot of information from their service providers and, for some, part of the information may be new. The disclosures need to be evaluated through a deliberate due diligence process so that, ultimately, the plan sponsors can demonstrate that they have fulfilled their fiduciary obligations. That can include evaluating the materials and documenting the review process and the decisions that are made. A plan sponsor should just take the information and file it away, because that eventually could become a road map for litigation.

PS: How will the new disclosures differ from what plan sponsors receive now, either in form or substance? Goldbrum: One important change is that indirect compensation or “revenue-sharing” must be disclosed. The rule requires the vendor to describe all indirect compensation it may receive, describe the services provided for the compensation and identify the payer. For some plans, this may be new information. However, it’s important to keep in mind that the DoL did not say that revenue-sharing is impermissible, they just want it fully disclosed.