July 1 Deadline for Retirement Plan Compliance Has Passed — What Happens Now?

As most retirement plan sponsors know, July 1, 2012 was the deadline for complying with the Department of Labor (DOL) service provider disclosure rules. What should the plan sponsor do now that the July 1 deadline has passed?

Compliance Obligations:

First, here’s a quick review of the duties of the responsible plan fiduciary for compliance with the DOL’s rules:

• Identify all Covered Service Providers (CSPs) and determine if you received a service provider disclosure from all CSPs.
• If you did not receive a service provider disclosure from a CSP, notify the CSP and request the disclosure.
• Review all CSP service provider disclosures and determine whether the CSP:

Described all of the services provided to the plan;

Disclosed its status as a fiduciary and/or an investment advisor;

Disclosed any conflicts of interest; and

Revealed all fees and if so, whether the fees are reasonable in connection with the services provided.

• Next, document the CSP disclosures and the process you followed to determine if the fees are reasonable.

Key Questions and Answers:

Question: What should a responsible plan fiduciary do if a CSP has not provided a service provider disclosure by July 1 or the fiduciary’s review indicates incomplete disclosures?

The DOL regulations provide that if a CSP fails to provide disclosure or provides an incomplete provider disclosure, the fees paid to such CSP are deemed to be unreasonable. The payment of unreasonable fees results in a prohibited transaction between the plan and the service provider, which subjects the plan fiduciary to an excise tax.

Question: Can the responsible plan fiduciary avoid the prohibited transaction and excise tax if the CSP has not cooperated?

There is a remedy if the responsible plan fiduciary takes action soon after the
July 1 deadline. The plan fiduciary must submit a written request to the CSP requesting the CSP to provide the service provider disclosures immediately or indicate why the disclosures will not be provided. If the requested information is not disclosed within 90 days after the request, then the responsible plan fiduciary must terminate the CSP as soon as possible. Taking these steps will provide the fiduciary with relief from prohibited transaction taxes.

To-Do List:

The prudent responsible plan fiduciary should:

• Assess whether CSPs have provided a complete service provider disclosure;
• If not, a letter to the CSP must be prepared and mailed as soon as possible after July 1;
• If a response is not received or the response is inadequate or insufficient, the responsible plan fiduciary must notify the DOL of the failure and terminate the contract for future services.

If the responsible plan fiduciary takes action to terminate the non-cooperative CSP, then the responsible plan fiduciary is protected from the prohibited transaction rules and excise tax. If the responsible plan fiduciary does not take action, the fiduciary is non-compliant and is subject to the prohibited transaction rules and excise tax.

Summary:

In summary, the DOL has cast a wide net in its attempt to make certain that compensation arrangements for retirement plans meet a reasonable fee standard. The vigilant plan fiduciary must take action now if there is any doubt about whether the retirement plan is compliant with the new rules.