Los Angeles partner Fred Reish spoke to Employee Benefit News about the Department of Labor's new disclosure requirement under a regulation amplifying under ERISA section 408(b)(2), which is applicable April 1, 2012.
The regulation under section 408(b)(2) of ERISA requires companies that provide services to retirement plans to disclose their status in relationship to the plan, i.e., if they are acting in a fiduciary capacity, they must explicitly state so.
Fred, a member of the firm’s Employee Benefits & Executive Compensation Practice Group and chair of the Financial Services ERISA Team, noted, however, that, "if they are not [acting as a fiduciary], there is no requirement that they make that negative statement."
Fred said that he believes many plan sponsors will be surprised to learn through this process that individuals or entities they had been relying on for advice about their plans - particularly regarding the selection of investments - are not, in fact, fiduciaries.
He addressed the eternal "who-is-a-fiduciary" question as follows: While noting that an individual can be given the official designation as plan fiduciary, in most cases the ultimate test of fiduciary status "is functional."
Although the fiduciary status determination has been made "a little murky" by conflicting court determinations in fiduciary breach cases over the years, Fred continued, "as a general rule, the Department of Labor takes the position that the decision-maker is the fiduciary."
Fred noted that some broker-dealers advising companies on 401(k) investments are worried about losing 401(k) clients by virtue of not being a fiduciary and may soon modify their compensation practices accordingly, perhaps to a fixed fee, regardless of which investments are selected by the plan.
He emphasized that fiduciaries "have a duty to prudently review and evaluate all the information they're going to be getting under 408(b)(2)" as the compliance date approaches.
"They'll have to look at the services and ask, 'Are these the services we thought we were getting? And do we think the compensation is reasonable?’” he said.
Fred added that if 408(b)(2) disclosures reveal that a particular service provider is not acting in a fiduciary capacity, the plan sponsor will need to assess whether the needs of the plan would be better served if that service provider were indeed acting in a fiduciary capacity. However, he continued, "if the providers aren't fiduciaries, there's no requirement that the plan sponsors to do anything" to change the situation.
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