Risk Alert: New Disclosure/Reporting Requirements for ERISA Plan Service Providers

The Department of Labor (DoL) is expected to release its final regulations on proposed amendments to ERISA §408(b)(2) later this summer. The new regulations, which are expected to become effective January 1, 2009, will shift the burden of providing documentation demonstrating compliance with ERISA’s prohibited transaction rules from plan sponsors to service providers, including broker-dealers and registered investment advisors (RIAs). Firms that fail to comply with the exhaustive disclosures relating to direct/indirect compensation and potential/actual conflicts of interest could face significant risk of legal liability as well as financial penalties.

The new rules will require advisers and brokers to have written agreements with their plan sponsor clients that disclose all of their compensation and any conflicts of interest prior to entering into an engagement with the plan. This requirement is designed to give the plan sponsor time to evaluate the reasonableness of the arrangement. Consequently, broker-dealers and RIAs will want to examine their internal policies and procedures with respect to delivery of the relevant information. Additionally, the proposed rules require that the disclosures be made to the “responsible plan fiduciary.” Given that some plan sponsors delegate the administrator functions to committees or third-parties, careful attention must be paid to ensure the disclosures are delivered to the proper party.

The rules will also require the service provider to state whether or not it is acting as a fiduciary under ERISA or the Investment Advisers Act of 1940. Given the reluctance on the part of many broker-dealer firms to accept fiduciary responsibility in any capacity, this requirement may pose a significant challenge to such firms. At a minimum, broker-dealers should reexamine their service models and compliance procedures to determine whether or not fiduciary services are being rendered. RIA firms, which are more accustomed to acknowledging fiduciary status under the Advisers Act of 1940, will nevertheless need to identify those services that give rise to ERISA fiduciary status and specifically acknowledge the same in their service agreements.

As discussed, to the extent the aforementioned requirements are not met, the service provider will have engaged in a prohibited transaction and may be subject to excise taxes and disgorgement of compensation for any services rendered under the prohibited agreement. Firms will need to act quickly to address these issues and develop compliant service models and agreements. In addition, affected service providers should examine their insurance coverage for fiduciary and non-fiduciary activities to determine whether the proffered services are covered sufficiently.