The proposed rule is the second of three fee-related regulations the DOL plans to issue. It requires service providers to disclose, in writing, to plan fiduciaries of 401(k) plans and other employee benefit plans all services to be furnished; all direct and indirect compensation to be received; and any potential conflict of interest, such as material third-party relationships, that could affect their objectivity under a service contract or arrangement.
“One of the department’s top priorities is improved disclosure in order to ensure that participants and fiduciaries have the information they need to make informed decisions,” U.S. Secretary of Labor Elaine L. Chao said in a statement. “We are moving quickly to implement regulations that foster fair, competitive and transparent prices for services as well as combat excessive or hidden plan fees.”
Under the Employee Retirement Income Security Act, plan fiduciaries are required to act solely in the interest of participants and beneficiaries and to pay only reasonable plan expenses that are necessary, said Bradford P. Campbell, assistant secretary for the Labor Department’s Employee Benefits Security Administration, in a press call. But because of the increased complexities within the financial services industry, it has become more difficult for plan fiduciaries to understand how service providers are compensated and whether conflicts exist, he said.
“We’re helping define what ‘reasonable’ means so it’s clear when that duty has been met,” he said.
The proposed regulation affects only certain providers: fiduciary service providers; providers of banking, consulting, custodial, insurance, investment advisory or management, record keeping, securities brokerage or third-party administration services; or providers that receive indirect compensation for accounting, actuarial, appraisal, auditing, legal or valuation services.
The Labor Department estimates that the cost of the proposed regulation, which falls on the service providers, will be about $52 million in the first year of implementation and about $36 million the second year. The benefits—which may include lower fees, increased efficiencies and some reduced costs—will outweigh the costs of compliance, the Department of Labor said.
Under the proposed rule, which will be published in the Federal Register on Thursday, December 13, plan fiduciaries are provided an exemption if they enter into contracts that are not “reasonable” because, unbeknownst to them, the service provider failed to comply with its disclosure obligations.
The new rule is the second of three fee-related regulations the Department of Labor will issue, Campbell said. The first regulation governs disclosure by plans to the public and government, while the last regulation, which will be issued “in the next couple of months,” will govern disclosure by plans to plan participants.