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Disclosure Transparency Deadline Looms
By Louis S. Harvey, CEO Dalbar, Inc. on Nov 07, 2012


 

Transparency Analysis
The transparency analysis highlights the usefulness of the disclosure to communicate Estimated Costs, Description of Services, Fiduciary Responsibility and Conflicts of Interest. The analysis also provides technical details about the Accessibility and Consistency of information and the extent of compliance with Regulations.
ERISA requires covered service providers to disclose information to responsible plan fiduciaries (plan sponsors) that will permit the plan sponsors to determine if services being provided to the plan are necessary, reasonable and cost effective for the plan. The disclosures are in four broad categories, estimates of cost, description of services, fiduciary responsibility and conflicts of interest.
Dalbar examines disclosure to assess whether the information is provided and its usefulness to plan sponsors in meeting the requirement to determine if services being provided to the plan are necessary, reasonable and cost effective for the plan.
Overarching Regulation
To the extent that responsible plan fiduciaries are unable to obtain relevant compensation information, or unable to use it to choose among service providers in a manner that upholds their fiduciary duty, a failure exists in the market for services for employee benefit plans. This final rule will improve the transparency of service arrangements by requiring specific disclosures of service provider compensation before a service contract or arrangement can be considered reasonable under ERISA Section 408(b)(2).
Accessibility: Assessment of Reasonableness
[Section 408(b)(2) of] Employee Retirement Income Security Act of 1974 (ERISA or the Act) requir[es] that certain service providers to employee pension benefit plans disclose information to assist plan fiduciaries in assessing the reasonableness of contracts or arrangements, including the reasonableness of the service providers' compensation and potential conflicts of interest that may affect the service providers' performance.
Fundamental to a plan fiduciary's ability to discharge these obligations is the availability of information sufficient to enable the plan fiduciary to make informed decisions about the services, the costs, and the service provider.
ERISA nonetheless requires such contracts or arrangements to be “reasonable” in order to satisfy the ERISA section 408(b)(2) statutory exemption. ERISA section 404(a) also obligates plan fiduciaries to obtain and carefully consider information necessary to assess the services to be provided to the plan, the reasonableness of the fees and expenses being paid for such services, and potential conflicts of interest that might affect the quality of the provided services.
Consistency: Detect and Act on Errors
The Department notes that the class exemption, included as part of this regulation (paragraph (c)(1)(ix)), is meant to address situations in which a responsible plan fiduciary discovers an error or other deficiency in the disclosure.
Paragraph (c)(1)(vii) is meant to provide the parties an opportunity to avoid a prohibited transaction by addressing errors up front. Once a prohibited transaction has occurred, the responsible plan fiduciary will need to rely on the relief provided by the class exemption…
Required: Sufficiency of Information
Ultimately …the responsible plan fiduciary must, under sections 404 and 408(b)(2) of ERISA, decide whether it has enough information about the services to be provided pursuant to the contract or arrangement to determine whether the cost of such services to the plan is reasonable.
Accordingly, if a particular description of services provided by a covered service provider lacks sufficient detail to enable the responsible plan fiduciary to determine whether the compensation to be received for such services is reasonable, the responsible plan fiduciary must request additional information concerning those services.
For further information concerning the Transparency Analysis please e-mail to ERISAFeeDisclosure@Dalbar.com.
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Louis S. Harvey
President & CEO
 

 

 

Founder and leader of Dalbar, Lou Harvey is relentless in the search for the forces that are shaping the world of financial services today, tomorrow and for years hence. Using Dalbar’s research capabilities, Lou Harvey seeks insights from inside and outside the industry to understand and anticipate changes in customers’ needs and the ways products are distributed.

 

Read more about Lou on www.dalbar.com

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