DOL has taken the position that, if a fiduciary needs information to make an informed decision in selection or monitoring a service provider, the fiduciary is governed by ERISA Section 404 rules and is required to request that information. Should a service provider refuse or fail to deliver the information, the onus would be on the fiduciary to discontinue or refuse to enter a service contract or arrangement with that service provider. The requirements of the one are independent of the other, and DOL has said the disclosure rules should be interpreted broadly to make sure fiduciaries review any arrangement with a provider based on comprehensive information.

The method of disclosure itself could be an issue, according to Beth Dickstein, a partner in the employee benefits group at law firm Sidley Austin. While DOL has said it would issue additional guidance regarding how fees are to be disclosed, it hasn't done so yet. Many firms are taking a wait-and-see attitude about preparing and finalizing disclosures, while others are following the sample provided by the Employee Benefits Security Administration on their website. It isn't required to follow the sample, but it does indicate a way in which to inform fiduciaries where to find a variety of required data that might be located in numerous locations.

Cost control

Another issue is that plan fiduciaries might not be aware of some of the costs involved in retirement plans, and might not know how to evaluate them. With regard to recordkeeping, Dickstein says, the regulations say that when there's no stated charge, the record keeper has to come up with a good-faith estimate of the cost. There is some concern, she says, that such charges might be confusing to plan fiduciaries for two reasons. First, some might not be aware they were paying for recordkeeping at all. That could have the potential result of causing disagreements between fiduciaries and record keepers over the charges themselves.

Second, they might not know how to judge whether such charges are fair and typical within the industry.

There's also the possibility record keepers themselves could choose a figure that isn't truly representative of the cost of the service—particularly if the number overstates the cost. There are other factors that could make the estimating of recordkeeping costs difficult: if, for instance, it's offset or rebated based on some other compensation received by the covered service provider, an affiliate, or a subcontractor. But the requirement still exists, and the service provider must find a way to estimate the cost, as well as to explain how the estimate was calculated.

Covered service providers themselves can be an issue, since some services, such as accounting, legal and actuarial services, can be paid indirectly. Certain record keepers set up expense accounts to be used by plan sponsors to pay administrative expenses of the plan, including expenses for these services. If the expenses are paid from such accounts, rather than directly by the plan or the plan sponsor, the persons providing such services could become covered service providers because of the way the payment for the fees is funded. However, depending on how checks are cut, those third parties might be unaware of their status.

An indirect problem

Indirect compensation is another area in which there is potential for misunderstanding. Covered service providers must not only disclose indirect compensation, but also the services for which the indirect compensation is received and who is paying. While the interim rule did not require it, the final rule mandates that, in addition, the arrangement between the payer and the covered service provider, an affiliate, or a subcontractor, as applicable, be disclosed as well, pursuant to which the indirect compensation is paid.

That way, the plan fiduciary will be able to see potential conflicts of interest that could arise out of the indirect compensation. The covered service provider has to describe its arrangement regarding such compensation so that the responsible plan fiduciary can see why the service provider is being paid by what could otherwise appear to be an unrelated third party, and how it relates to the covered plan.

Originally examples of such instances were included in the rule, but DOL chose instead to rely on fuller disclosure of the circumstances under which the covered service provider will be receiving compensation from parties other than the plan or the plan sponsor. This was done in the interests of avoiding too broad a scope of the earlier proposed conflict of interest requirements.

However, DOL also intends the concept of such compensation, to be received by a covered service provider or its affiliates or subcontractors, ''in connection with'' a particular contract or arrangement for services, to be construed broadly as well. It cites this example in a conflict of interest report prepared by its Office of Inspector General:

“A service provider failed to disclose that some financial institutions had subsidized attendance costs at a conference that the provider had offered for its clients. While plan sponsor attendees were charged a registration fee of $850 that was to help defray conference costs, at the same time the financial institution subsidized the conference with a fee of $20,000.

Since the service provider was providing consulting services to a plan or plans, if it received subsidies or other remuneration from bodies about which it might make recommendations, those subsidies or other remuneration would be received “in connection with” the service provider's contract or arrangement with the covered plan and would require to be reporting.

Dickstein points out another area of concern. That's whether a broker-dealer would be able to properly identify the payer of indirect compensation in connection with brokerage windows. While the provider of the brokerage window is supposed to disclose indirect compensation through several types of investments that plan participants can make, the provider will not know up front which of those investments a participant will choose.

Dickstein says the question is what companies will do with this disclosure once they get it. Smaller companies will have a harder time knowing what to do with the information. Still, they should document they've reviewed it, she says, and that they've evaluated whether the fees are reasonable. But smaller clients, she says, who might not be as savvy about such matters, could possibly be put in the position of looking worse once the law takes effect “because they didn't notice that they were paying too much.”

However, she adds, what's happening is that the regulation is driving down fees in connection with recordkeeping—but, she says, “it's sort of incidental rather than people actually negotiating for them.”