408(b)(2) Disclosure Regulations Delayed to July 1, 2012

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The Employee Benefits Security Administration (EBSA) is releasing final 408b-2 regulations.

In addition to removing the “Interim” tag on the regulations, a few changes were made to the disclosure rules.

Most importantly, the effective date for 408b-2 compliance was moved back to July 1, 2012.

The following are some of the newest 408b-2 regulation changes to what have been referred to as the “reasonable contract” regulations:

• Certain 403(b)s excluded from the requirements. Must have been issued to employees prior to 1/1/2009, the employer ceased making contributions, individual employees can enforce contracts without employer’s involvement, and individuals are fully vested.
• Reporting of indirect compensation. The service provider must describe any arrangement between the payer and the service provider so that the fiduciary can understand why the payer is compensating the service provider.
• Investment-related disclosures. Service providers may comply with requirements regarding the investment-related disclosures by providing current disclosure materials of the investment issuer (like a mutual fund’s prospectus) as long as the institution issuing the disclosure materials is regulated (previously the materials themselves, not the institution, had to be regulated).
• Fiduciary action upon service provider failure to disclose. If the service provider fails to provide disclosures within 90 days of the fiduciaries’ written request the fiduciary must determine whether or not to terminate the contract consistent with its duty of prudence. If the information relates to future services and is not promptly disclosed after the 90 days, the fiduciary must terminate the arrangement “as expeditiously as possible.”
• Effective dates delayed. The new effective date for the service provider disclosures to plan fiduciaries is now July 1, 2012. Because the new participant-level disclosure regulations’ effective date is predicated upon the 408b-2 effective date, the initial disclosure is now pushed back to end of August and the first quarterly statements that must comply with the new participant disclosure rules will have to be delivered by November 14 (for calendar year plans).

In releasing its long-awaited final regulation on Service Provider Disclosure under ERISA section 408(b)(2) today, the Department of Labor has delayed the effective date to July 1, 2012.

Impact on 408(b)(2) Participant Disclosure Dates

Importantly, plan fiduciaries should be aware that this delay will also impact the distribution of new required participant disclosures as required delivery dates are tied to the effective date of the 408(b)(2) regulation.

• Thus, for calendar year plans, the initial disclosure of plan level and investment level information must now be distributed no later than August 30, 2012.
• The first quarterly statement under the new rules must be furnished no later than November 14, 2012.

Impact on 408(b)(2) Disclosure to Plan Sponsors

The rule, was previously slated to go into effect on April 1, 2012, requires service providers to disclose to plan sponsors information about:

(1) the services to be performed; and

(2) the fees and compensation to be received for performing those services.

The intent of the regulation is to make it easier for plan fiduciaries to assess the reasonableness of the fees paid to service providers in comparison with the service provider’s delivery of services and performance. The action today extends the effective date to July 1, 2012 in order to give service providers more time to respond to specific changes from the interim regulation.

The DoL had intended to include a so-called “summary” or “guide” requirement in the final regulation. However, that requirement is not included in the regulation released, but will be part of an additional regulation expected to be proposed later this year.

We Help Plan Sponsors Comply With 408(b)(2)

Further analysis is currently underway to assess any changes between the interim final rule published in 2010 and today’s final regulation. We will provide you with additional updates once that analysis is available as well an update as to how the change in effective date may impact delivery of participant disclosure notices to your plan participants.

If you would like a free 401(k) benchmark analysis to help plan sponsors comply with 408(b)(2), please contact us at 415-677-9300.

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