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Monday, July 16, 2012

By July 1, 2012, administrators or other fiduciaries of most retirement plans should have received plan level disclosures from all of the plan’s covered service providers.  The disclosures should describe the types of services being provided, the status of the covered service provider as an ERISA §3(21) or registered investment advisor fiduciary, the type and amount of compensation the covered service provider receives from the plan, various investment-related disclosures and the manner of receipt of compensation.  (As discussed in more detail in our prior post).  Plan fiduciaries (including plan administrators) have certain duties with respect to the receipt of this information and with respect to the possible failure to have a covered service provider disclose the information.

The plan fiduciaries must satisfy themselves that they have received the disclosures from all covered service providers who are required to provide the information.  The fiduciaries must read, understand, and evaluate the information in order to determine that the fees identified in the disclosures are reasonable and that the services being provided and paid for are appropriate and necessary for the administration of the plan.  This does not mean that every plan should pay the lowest possible amount for services, but rather that the fiduciaries must determine that the fees being paid are reasonable with respect to the quality of necessary services being provided.

The failure of a plan to pay reasonable fees for necessary services will result in a potentially expensive prohibited transaction for the plan’s fiduciaries.  If not promptly and properly addressed (as discussed below), this could expose fiduciaries to taxes, penalties, and litigation.

Once the fiduciaries have reviewed the information, it would make sense to have a meeting to discuss the disclosures and confirm that the fees are reasonable and that the services are necessary.  This may require the assistance of the plan’s investment advisor who should be able to benchmark the fees by comparing them to fees charged to plans by other providers for similar services or by conducting an actual or hypothetical Request for Proposal.  For small plans that do not engage the services of an independent investment advisor to assist them with this process, the burden falls directly on the shoulders of the fiduciaries who must use the marketplace to make the appropriate determinations.

If a fiduciary determines that the disclosures are inadequate or that a covered service provider did not make the disclosures, there are steps the fiduciary must take to rectify the failure to receive the information that we will address in a later post.

Plan fiduciaries cannot simply ignore all of the information that they recently received.  They must take affirmative steps to act upon that information, consult with relevant advisors to the extent appropriate, and make appropriate fiduciary decisions with respect to it.

Related Links

Prior Post on 408(b)(2) Disclosures

Prior Post on Participant-Level Fee Disclosure Guidance

Prior Post on Fee Disclosures and The Duty to Inform

Disclaimer/IRS Circular 230 Notice

 

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