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Case of the Week: What is ‘Reasonable’ Timing for Service Provider Disclosures for New Contracts?

The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a financial advisor in New Jersey is representative of a common question related to the requirements surrounding plan service provider fee disclosures. The advisor asked:

“Is there a deadline by which plan service providers must furnish their required fee disclosures to plan fiduciaries when they enter into new contracts?”

Highlights of Discussion

• Pursuant to final regulations under ERISA Sec 408(b)(2), the answer is “… reasonably in advance of entering into, or extending or renewing, the contract or arrangement for services.”
• The regulations provide little guidance as to what would constitute reasonably in advance. As stated in the commentary to the final regulations, the DOL “… is confident that the parties to a service contract or arrangement will be able to determine what is ‘reasonable’ in this context.”
• Understanding the overall purpose of the disclosure might help evaluate what would constitute an amount of time that is reasonable. Pursuant to the Employee Retirement Income Security Act of 1974 (ERISA), plan fiduciaries have a fiduciary obligation to obtain and carefully consider information necessary to assess the services being provided to the plan, the reasonableness of the compensation being paid for such services, and potential conflicts of interest that might affect the quality of the provided services. This is true for ongoing contracts as well as for new, extended and renewed contracts.
• Therefore, plan fiduciaries must have time to review, reflect and, presumably, do some cost comparisons with other service provider candidates.
• Because the “reasonably in advance” timeframe is open to interpretation based on the circumstances, some service providers have taken the practical approach of having the responsible plan fiduciary represent, in writing, that it has received the service provider's fee disclosure reasonably in advance of executing the service agreement.

Conclusion

For new, extended or renewed service contracts, disclosures are due reasonably in advance of executing the agreement. While there is no hard and fast rule as to what that timeframe is, there are practical approaches service providers can take to help demonstrate compliance. Financial advisors who can demonstrate their knowledge of the finer details of the DOL’s service provider fee disclosure rules set themselves apart from the average advisor.

The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2013 Columbia Management Investment Advisers, LLC. Used with permission.

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