EBSA issues proposed regs that would require service providers to furnish “guide” to required service and fee disclosures

The Employee Benefits Security Administration (EBSA) has issued proposed regulations that would amend the fee disclosure rules issued in February 2012. The proposed amendment would require service providers to furnish plan fiduciaries with a “guide” to required initial disclosures that are contained in multiple or lengthy documents. The guide, which would be provided in a separate document, is intended to enable fiduciaries, especially those responsible for small and medium sized plans, to easily locate and access “all principle data elements required as initial disclosures” in a cost-effective manner. The proposed amendment does not provide immediate reliance. The amendment is proposed to become effective 12 months after publication of a final amendment in the Federal Register.

Note: It is important to note that the proposed guide would not be a “summary” of the provided documents. EBSA was concerned that plan fiduciaries would primarily rely on such a summary rather than conduct the full review of the disclosures necessary to determine the reasonableness of a service contract, evaluate fees, and identify potential conflicts of interest.

Final rules required detailed service fee disclosures

The final regulations issued under ERISA §408(b)(2), effective July 1, 2012, were designed to provide plan fiduciaries with sufficient information to evaluate the reasonableness of compensation and fees directly and indirectly paid to certain service providers (including affiliates), and assess the potential for conflicts of interest that may affect the performance of a service provider. A service contract or arrangement would not be reasonable, for purposes of the prohibited transaction exemption authorized under ERISA for necessary plan services, unless covered service providers (including fiduciary service providers, banks, consultants, investment providers, and third party administrators) complied with a series of new disclosure requirements.

The rules generally require disclosure of services to be provided to a plan by a covered service provider and compensation (direct and indirect) to be received by the provider. Covered providers would be further required to furnish information regarding investments with respect to which they are fiduciaries or provide recordkeeping and brokerage services.

Summary of initial disclosures. In seeking to promote economic efficiency and afford providers flexibility, the final regulations did not specify standards regarding the format in which the required information must be released. Accordingly, the rules allow covered service providers to satisfy the disclosure requirements using different documents from various sources as long as the documents, collectively, contain the required disclosures.

EBSA acknowledged, however, that allowing the disclosure requirements to be satisfied through multiple documents could make it difficult and time consuming for responsible plan fiduciaries to find and analyze particular disclosures. Moreover, EBSA cautioned, the benefits associated with providing the disclosures could be diluted if the information provided to responsible plan fiduciaries was obscured in long, highly technical documents.

Therefore, EBSA solicited comment as to whether service providers should be required to furnish a summary disclosure statement, including key information that would provide an overview of the required information. Specifically, the Department requested comments addressing the costs, benefits, and burdens associated with requiring a summary or guide and how it could effectively construct such a requirement to ensure that the summary or guide was practical and useful.

Comments on the final rules raised concerns that providing many voluminous documents could be overwhelming to fiduciaries who would need to invest substantial time and effort finding the relevant information. The proposed rules attempt to address these concerns by requiring covered service providers to furnish a responsible plan fiduciary with a guide to all relevant information.

Proposed guide to initial disclosures

Under the proposed amendment, in the event required information (e.g., initial disclosures under ERISA Reg. §2550.408b-2(c)(1)(iv)(A)-(G)) are not disclosed in a single document, or if the document is in excess of an unspecified number of pages, the covered service provider would be required to furnish the responsible plan fiduciary with a guide specifically identifying the document and page or other sufficiently specific locator ( such as a section) that would enable the responsible plan fiduciary to quickly and easily find information applicable to the contract or arrangement. Service providers could choose pagination or a more general alternative.

EBSA advises that service providers who furnish the required information in a concise single document would not also be required to furnish fiduciaries with a separate guide to the disclosures.

Specific locator. A provider would not be able to merely indicate that required information is contained in a separate service contract or prospectus. The specific locator would need to guide a fiduciary to the exact location (e.g., page number) of the required information in the document. Document and pagination requirements are envisioned as providing a direct and unambiguous point of reference. However, EBSA is soliciting comments with respect to acceptable alternative locators.

Electronic disclosure. Similar standards apply to information that is electronically disclosed. A service provider may not merely furnish a link to a separate contract or prospectus. The provider would need to disclose a direct link to required information or provide a sufficiently specific location in addition to an electronic hyperlink.

Required information

The guide would need to direct the fiduciary to the location in the disclosure documents of the following information:

(1) The description of services to be provided;

(2) The statement concerning services to be provided as a fiduciary and/or as a registered investment adviser;

(3) The description of all direct compensation;

(4) The description of all indirect compensation;

(5) The description of any compensation that will be paid among related parties;

(6) The description of any compensation for termination of the contract or arrangement;

(7) The description of all compensation (and/or a reasonable estimate of the cost to the covered plan) for recordkeeping services; and

(8) The required investment disclosures for fiduciary services and recordkeeping and brokerage services, including annual operating expenses and/or ongoing expenses.

Contact person. The guide would need to identify a person or office, including contact information for a plan fiduciary with questions regarding the disclosures being provided.

Separate document. The guide would need to be furnished by the service provider in a document that is separate from those containing the required disclosures. The requirement, EBSA explains, would ensure that the guide is brought to the fiduciary’s attention and prominently featured so it can be used effectively in a review of the required disclosures.

Annual disclosure of changes to previously furnished information

The proposed rules would require a covered service provider, on at least an annual basis, to disclose any changes to previously disclosed information. EBSA believes that periodic disclosure of any changes to the information contained in the guide would be more beneficial to plan fiduciaries and less burdensome to covered service providers than an ongoing and sporadic disclosure of every change to a component of the guide. However, EBSA is soliciting comments as to whether it would be more effective to require that the entire guide (rather than only changes to information contained in the guide) be disclosed on an annual basis, if changes have occurred during the preceding year.

Sample Guide

EBSA is not providing a model guide. However, the Department has made available on its website (http://www.dol.gov/ebsa/pdf/408b2sampleguide.pdf) a sample guide to the initial disclosures (initially published in an Appendix to the final rules in order to facilitate public comments on this proposal). EBSA is also soliciting comments on whether including such a model guide in the final rule would provide useful guidance and reduce compliance costs for at least some service providers.

Request for comments

EBSA is soliciting detailed and focused comments on the structure of the guide, as proposed, and whether its requirements are feasible and cost-effective. EBSA is looking for input specifically with respect to: the types of products and services that will require a guide; economies of scale that would allow service providers to prepare a guide for one product or service that could be used for multiple clients; and an estimate of the costs anticipated by providers in creating the guides. Comments are due on or before June 10, 2014.

Focus group testing

In connection with the issuance of the proposed regulations, the Labor Department has issued a notice of intent to request approval from the Office of Management and Budget (OMB) for the collection of data for the project titled “Evaluating the Effectiveness of the 408(b)(2) Disclosure Requirements.” The DOL intends to conduct approximately eight to ten focus group sessions with approximately 70 to 100 fiduciaries to small pension plans (those with less than 100 participants). The purpose of the focus group testing is to explore current practices and effects of EBSA’s final regulation and to gather information about the need for a guide, summary, or similar tool to help fiduciaries navigate and understand the disclosures.

Written comments on the information collection request must be submitted on or before May 12, 2014. Copies of the proposed collection of information can be obtained and comments may be forwarded by either one of the following methods: Email: richie.celeste.j@dol.gov; Mail or Courier: Office of the Assistant Secretary for Policy/Chief Evaluation Office, U.S. Department of Labor, Room S-2312, 200 Constitution Avenue NW., Washington, DC 20210.

Source: 79 FR 13949, March 12, 2014.

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