DOL Allows Online Notification for Deficiencies in Service Provider Disclosures

November 12, 2012

The website of the Department of Labor (DOL) now offers a way for benefit plan fiduciaries to notify the DOL online of any covered service provider’s failure to satisfy the fee disclosure requirements of the DOL’s regulations under Section 408(b)(2) of ERISA. Such notification is one of the steps a fiduciary must take in the event of such a failure, in order to avoid engaging in a prohibited transaction by continuing to use such a provider’s services.

The first disclosures to plan fiduciaries under the regulations had to be made by this past July 1. It is therefore worthwhile at this time to review what a fiduciary must do if it has not received the required disclosures.


In general, the furnishing of goods, services or facilities to an employee benefit plan by a “party in interest” (a term that includes a service provider to the plan) is a prohibited transaction under ERISA Section 406(a)(1)(C). However, Section 408(b)(2) exempts certain contracts or arrangements between service providers and employee benefit plans for necessary services if the arrangement and the compensation for such services are reasonable.

In February of this year, the DOL issued final regulations under ERISA Section 408(b)(2) providing that no contract or arrangement for services between a “covered plan” and a “covered service provider” will be considered reasonable for purposes of Section 408(b)(2) unless the provider satisfies certain disclosure requirements, including as to direct and indirect compensation payable to it. Therefore, if the provider fails to provide the required information, the plan fiduciaries may be engaging in a prohibited transaction by continuing to retain such provider.

Most pension benefit plans, including all qualified retirement plans, are covered plans under the regulations. In general, one is a covered service provider under the regulations upon entering into a contract or arrangement with a covered plan if $1,000 or more in compensation, direct or indirect, is expected to be received in connection with providing services as a fiduciary or registered investment adviser or certain recordkeeping or brokerage services. Providers of other types of services, including actuarial, accounting and legal services, are covered service providers only if the $1,000 threshold is met or exceeded in connection with indirect compensation.

Under the regulations, a covered service provider must, among other things, disclose in writing to plan fiduciaries comprehensive information about the compensation it will receive in connection with services provided pursuant to the contract or arrangement, including any indirect compensation it will receive from sources other than from the benefit plan. The provider must not only identify the payer of the indirect compensation but also describe the arrangement between the payer and the service provider pursuant to which indirect compensation is paid.

For an in-depth analysis of the disclosure requirements, see our article earlier this year.

Prohibited Transaction Exemption

The regulations provide a class exemption to allow a plan fiduciary to avoid engaging in a prohibited transaction notwithstanding the failure of a covered service provider to disclose all the information required by the regulations. The exemption applies to a fiduciary who did not know that the provider failed or would fail to make required disclosures and reasonably believed that the provider had disclosed the required information. To obtain relief under the exemption, the fiduciary must, among other things:

  • Upon discovering that the provider failed to disclose the required information, request in writing the missing information from the provider;
  • If the provider fails to provide the missing information within 90 days, notify the DOL no later than 30 days following the earlier of the provider’s refusal to provide the information or 90 days following the date the missing information was requested; and
  • If the missing information is not provided within 90 days, (i) prudently determine whether to terminate or continue the existing arrangement consistent with its duty of prudence under ERISA Section 404 or, (ii) if the arrangement is for future services, terminate the arrangement as soon as possible.

The notice to the DOL can be sent by regular mail or email and can now also be completed and submitted online from the DOL’s website. This website also provides a model fee disclosure failure notice.

Recommended Steps for Fiduciaries

In order to avoid engaging in a prohibited transaction as a result of a covered service provider’s failure to comply with the new disclosure requirements, fiduciaries should take the following steps:

  • Review the disclosures by all covered service providers in light of the regulations and notify such providers of any deficiencies.
  • Take note of all unwritten service provider arrangements. There is no requirement under ERISA Section 408(b)(2) that service arrangements be in writing. If a service provider under an unwritten arrangement is a covered service provider, and no disclosures under the regulations have been provided, notify the provider accordingly.
  • Develop a systematic process to review service provider arrangements. This review process should include decisions to enter into new arrangements, as well as whether to terminate or continue existing arrangements.

Review of Disclosure Documents by Auditors and DOL

The chief accountant of the DOL’s Employee Benefits Security Administration (EBSA) has stated that plan auditors are, in large part, going to be the enforcers of the service provider disclosure requirements. Accordingly, administrators of plans that must include audit reports with their annual Form 5500s (in general, those plans having 100 or more participants at the beginning of the plan year) should expect that their auditors will request copies of service provider disclosure documents for review. Prohibited transactions must be reported on Form 5500s.

The director of EBSA’s Office of Regulations and Interpretations has indicated that the DOL is collecting samples of disclosure documents in connection with assessing service providers’ compliance with the regulations.

For further information, please contact one of the authors or any other member of the McGuireWoods employee benefits team.