Specifically, certain service providers that are expected to receive at least $1,000 in compensation in connection with their services are required to provide a written description of the services to be provided and of any direct and indirect compensation to be received by the service provider, or by its affiliates or subcontractors. (Direct compensation is received directly from the plan; indirect compensation is received from any other source, other than the plan sponsor, the covered service provider, or the service provider's affiliate or subcontractor.) Certain specific types of information are required to be provided, such as with respect to recordkeeping services or services that are being provided as a fiduciary for an investment vehicle.  The service provider is also required to provide any information that is requested by the plan fiduciary in order for it to comply with its own disclosure obligation to participants, as well as a description of any changes to previously-disclosed information.

Failure to provide the required disclosures will make an arrangement ineligible for the exemption under section 408(b)(2) of ERISA, leaving the service relationship – and the payment of fees –  potentially a prohibited transaction.

BP: Until recently, the enforcement date for the rules was July 16, 2011, but the Department of Labor recently pushed the date to Jan. 1, 2012. What fueled their decision to do that?

JA: Basically, comments from the public.  

Numerous comments pointed out that the rule was not yet final (it is an "interim final rule"), and noted that if changes are made when the rule becomes final — even minor changes —  systems changes could be required to be made by service providers. For example, the Department has said that it was "considering adding a requirement that service providers furnish a summary disclosure statement . . . that would include key information intended to provide an overview for the responsible plan fiduciary of the information required to be disclosed. The summary also would be required to include a 'roadmap' for the plan fiduciary describing where to find the more detailed elements of the disclosures required by the regulation." The Department agreed that an extension of the effective date "would lead to fuller and timelier compliance by plans and service providers, and thus would be in the interests of participants and beneficiaries."

In addition, commenters suggested, and the Department agreed, that aligning the effective dates of the service-provider disclosure requirements and the participant-level disclosure requirements that also become effective this year would enable plan fiduciaries to "have all required information from service providers before they must disclose information to their workers, ensuring that workers receive accurate information about their retirement plan and investment costs." 

BP: What about the participant-level disclosure rules? What exactly must be disclosed, and when is the effective date there?  

JA: The participant-level disclosure rule is more than just fee disclosures. It provides that a plan administrator must ensure that participants in participant-directed plans are provided sufficient information regarding the plan and the plan's investment options, including fee and expense information, to make informed decisions regarding the management of their individual accounts.

In order to accomplish this, plan administrators will be required to provide participants with various plan-related information and investment-related information. (Plan administrators are protected against liability for accuracy and completeness of the participant disclosures to the extent that they rely on the information furnished to them by service providers.)

Plan-related information will be required to be furnished in advance of eligibility and annually thereafter, consisting of: (i) general plan information relating to the structure and mechanics of the plan (e.g., a list of investment options, including an explanation of "brokerage windows", how to give investment instructions, etc.); (ii) information concerning general administrative expenses that may be charged to all participants' accounts; and (iii) information regarding participant-specific expenses that may be charged directly to individual participant's accounts, such as plan loan application fees, fees for processing QDRO's, etc. Participants are also required to be furnished with quarterly (or more frequent) statements that show expenses actually charged to their accounts.

Investment-related information required to be furnished prior to the time a participant is first eligible to direct investments, and annually thereafter, will consist of the following for each available investment alternative: (i) annual rate of return, or, if there is no fixed rate of return, historical performance data (e.g., 1-, 5- and 10-year comparative performance and benchmark data); (ii) any shareholder-type fees or restrictions on the participant's ability to purchase or withdraw from the investment fund; (iii) for investments without a fixed rate of return, the total annual operating expenses expressed both as a percentage of assets and as a dollar amount per $1,000 invested; (iv) a website address where participants can obtain more specific information concerning the investment alternatives; (v) a glossary of terms needed to understand the furnished information (or a website that has such a glossary). The investment-related information is required to be furnished in comparative format, such as a chart or some other presentation that will enable participants to compare investment alternatives; the regulation contains a model chart that can be adapted by plan administrators.

Further investment information, e.g., prospectuses, financial statements and shareholder voting information, as well as any participant disclosures already required under the 404c regulations (if the plan is designed as a section 404c plan) are also required to be provided.

The regulation actually became effective on Dec. 20, 2010.  However, it first applies to plan years beginning on or after Nov. 1, 2011, and initial disclosures (for participants already eligible to direct investments) were not going to be required earlier than 60 days after the plan's applicability date. However, the 60-day "transitional rule" is extended to 120 days along with the deferral of the effective date of the service provider disclosure rule. For example, for a calendar year plan, the participant-disclosure regulation becomes applicable Jan. 1, 2012, and the initial new participant disclosures are required on or before April 30, 2012.

BP: How can service providers and fiduciaries be sure that the disclosures are sufficient?

JA: The providers of the disclosures – that is, the service providers in the case of the disclosures to plan fiduciaries, and the plan fiduciaries in the case of the participant disclosures – will have to wait for feedback from the recipients, or perhaps from the Labor Department. Since the purpose of the disclosures is largely to enable the decisionmakers to take fee information into account in their investment decision process, the sufficiency of disclosures is really for them to determine. The Labor Department, with significant comment from the various "players" in these transactions,  has determined what it believes ought to be sufficient, but the reality is that whoever is making investment decisions still has to be able to utilize the furnished information as intended.

The plan fiduciaries are in a unique situation with respect to these requirements. They are both recipients of disclosures from the service providers, and providers of information to plan participants. As a result, the plan fiduciaries will know when they, as investment decision makers, require additional disclosure, and they will hear from participants when the participants require additional disclosures. In either case, the plan fiduciaries and the service providers will have to determine whether additional information is, or can be, available for disclosure, and whether such additional disclosure will enable recipients to do their "job."

BP: Why does any of this matter? What is the ultimate impact on the financial industry?

JA: That's hard to say. Obviously, the need to keep track of and furnish substantial amounts of additional information, as well as making any needed modifications to its recordkeeping systems, will certainly have an impact on the industry. But the financial industry is not the intended beneficiary of these rules – at least directly. The intended beneficiaries are the investment decisionmakers, whether that is the plan participants, or the trustees of the plans themselves (or in some cases, both). They are being provided with information that will enable them to make better investment decisions. But it also enables them to be better consumers of the financial industry's products and services. So over time benefits may eventually come around to the financial industry.