Legal Alert: DOL Issues Proposed Regulations Relating to Service Provider Disclosures

Date   Dec 13, 2007

The Department of Labor published two proposed rules in today’s Federal Register relating to service provider disclosures required by ERISA § 408(b)(2).

The Department of Labor published two proposed rules in today’s (Dec. 13) Federal Register relating to service provider disclosures required by ERISA § 408(b)(2). One proposed regulation redefines what constitutes a “reasonable contract or arrangement” for purposes of the exemption from ERISA’s prohibited transaction provisions. The other proposed regulation provides for a class exemption for plan fiduciaries who enter into contracts with service providers that are not “reasonable” under ERISA because, unknown to the fiduciary, the service provider failed to comply with its disclosure obligations under the new companion regulation.


ERISA generally prohibits the furnishing of goods, services, or facilities between a plan and a party in interest to the plan. As a result, without an exemption, a service relationship between a plan and a service provider would constitute a prohibited transaction because any person providing services to a plan is considered under ERISA to be a “party in interest.”  ERISA § 408(b)(2) provides relief from ERISA's prohibited transaction rules for service contracts or arrangements between a plan and a party in interest if the contract or arrangement is reasonable, the services are necessary for the establishment or operation of the plan, and no more than reasonable compensation is paid for the services. To meet the requirements of the § 408(b)(2) exemption, plan fiduciaries must act prudently in selecting plan service providers.

According to the DOL, changes in the way services are provided to plans have resulted in complexities that make it difficult for fiduciaries to understand the way the plan is compensated and whether conflicts of interest exist that might affect the service provider’s performance. Accordingly, the DOL has proposed revising the regulations relating to § 408(b)(2) to require certain service providers to provide specific information to plan fiduciaries.

Covered Service Providers:

The proposed regulation applies to three types of service providers:

· service providers who provide services as a fiduciary under ERISA or under the Investment Advisers Act of 1940

· service providers who provide banking, consulting, custodial, insurance, investment advisory (plan or participants), investment management, recordkeeping, securities or other investment brokerage, or third party administration services, regardless of the type of compensation or fees that they receive; and

· service providers who receive any indirect compensation in connection with accounting, actuarial, appraisal, auditing, legal, or valuation services.

Disclosure Requirements:

The contract or arrangement between the plan and the service provider must be in writing. The proposed regulation includes the following requirements for these contracts or arrangements:

  • Compensation Information: The contract must require the service provider to disclose the services to be provided to the plan and all compensation it will receive in connection with the services. The proposed regulation broadly defines compensation or fees to include money and any other thing of monetary value (such as gifts, awards, trips for employees, etc.).  Additionally, the service plan provider must disclose all indirect compensation, which includes fees that service providers receive from parties other than the plan, the plan sponsor, or the service provider.

  • Conflicts of Interest: Service providers must also disclose information regarding relationships or interests that may raise conflicts of interest in performing plan services. Specifically, the service provider must describe any material financial, referral, or other relationship it has with various parties (such as investment professionals, other service providers, or clients) that creates or may create a conflict of interest for the service provider in performing services pursuant to the contract or arrangement. The service provider must also describe any participation or interest it has in transactions to be entered into by the plan. Further, the service provider must describe any compensation it may receive that it can affect without prior approval by an independent fiduciary and any policies or procedures in place to address potential conflicts of interest.

The proposed regulation also creates certain ongoing disclosure obligations for the service plan provider.  

Class Exemption for Fiduciaries

The DOL has also proposed an exemption from the prohibited transaction rules for a plan fiduciary who enters into or extends or renews a contract for the provision of services to an employee benefit plan by a service provider where the service provider failed to comply with the proposed regulation’s disclosure obligations (discussed above). To qualify for this exemption, the plan fiduciary must not know or have reason to know that the service provider failed to comply with its disclosure obligations. The fiduciary must request this information in writing when it discovers the service provider’s failure to comply. If the service provider fails to comply with this request, the fiduciary must notify the DOL.

The fiduciary must also determine whether to terminate the contract, considering, among other things, the availability, qualifications and costs of potential replacement service providers, and the responsiveness of the service provider in furnishing the information that the service provider should have disclosed, but did not.

Comment Period

The DOL will accept comments on the proposed regulations until February 11, 2008. Written comments may be submitted to: The Office of Regulations and Interpretations, Employee Benefits Security Administration, Attn: Plan Fiduciary Class Exemption for Section 408(b)(2) Amendment, Room N-5655, U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC 20210.

If you have any questions regarding the proposed regulations or any other employee benefit matter, please contact Tiffany Downs, Senior Counsel in our Atlanta office, at, or 404-888-3961 or any member of the Ford & Harrison Employee Benefits practice group.