Thanks to regulatory changes, 2012 is seeing some important modifications to ERISA (Employee Retirement Income Security Act) laws. Those changes will hopefully help ERISA pension plan participants and participants in company-sponsored employee savings plans better understand how those plans are managed. Along with the increased transparency surrounding the selection and monitoring of service providers, the new regulations also subject service providers to a new set of disclosures.
There are three major changes that will affect both plan sponsors and advisors:
- Plan sponsors now have the specific responsibility of determining if the costs and service provided to the plan and participants meets a reasonable standard. The challenge is that the rules do not define “reasonable standard.”
- There must be a specific designation on whether the advisor is acting as Fiduciary to the plan.
- Written disclosure of both the direct and indirect compensation received by the record keeper, broker-dealer, and advisor will now be required.
One regulation requires covered service providers to fully describe their services and fees. The goal is to help fiduciaries make more informed decisions about service providers. Service providers will now have to include information detailing the services that are provided, the costs of each service, and any direct or indirect compensation they receive. They will also have to disclose any potential conflicts of interest.
Plan fiduciaries now have to inform plan participants of the fees charged by service providers and also of the services provided. Failure to do so could be a violation of fiduciary duty. Among the fees that must be disclosed are fees paid from participant accounts and any charges that may be taken from a participant’s account.
Because fiduciary duty is paramount to ERISA laws, the Department of Labor has changed the rules regarding who is considered a plan fiduciary. The changes could result in the definition of “fiduciary” now including anyone who provides advice to the people in charge of retirement plans or ERISA accounts.
Previously, the “fiduciary” label was more strictly applied to people who provided regular, on-going advice to plan administrators. The problem was some service providers or financial planners offered advice on a regular basis but claimed they only did so occasionally, and therefore were not held to the fiduciary standard, and were not liable if their advice harmed the plan.
Plan fiduciaries have a legal obligation to act in the best interests of plan participants; failure to do so could be a breach of fiduciary duty and could result in an ERISA lawsuit being filed.
For more information on ERISA laws, go to:http://www.dol.gov/compliance/laws/comp-erisa.htm