March 30, 2012
Practice Groups:
Investment
Management
ERISA Fiduciary
Employee Benefits
DOL Final Disclosure Requirements for
Plan Service Providers – Deadline Looms
On February 2, 2012, the U.S. Department of Labor (“DOL”) issued final regulations under section
408(b)(2) of the Employee Retirement Income Security Act of 1974 (“ERISA”) requiring covered
service providers to disclose information regarding their services and compensation for such services
to responsible fiduciaries (the “Final Rule”). The Final Rule generally incorporates the provisions of
the “interim final” rule published in 2010 (the “Interim Rule”).1 This Client Alert describes the Final
Rule’s disclosure requirements and the steps “covered service providers” should be taking to be in
compliance with the Final Rule.
DOL extended the compliance date of the Final Rule to July 1, 2012. This also affects deadlines
for participant-level disclosures required by DOL regulations under ERISA section 404(a) (the
“participant-level disclosure regulation”). In general, for calendar-year plans, plan
administrators must provide annual participant-level disclosures no later than August 31, 2012,
and the first quarterly disclosures no later than November 14, 2012.
Although the participant-level disclosure regulation applies to plan administrators, the Final
Rule incorporates for certain covered service providers virtually all of the investment-related
disclosures required under the participant-level disclosure regulation. Thus, the Final Rule has
the effect of shifting, in large part, the practical responsibility for these investment-related
disclosures from plan administrators to such covered service providers.
Background
ERISA prohibits a party in interest, and the Internal Revenue Code (the “Code”) prohibits a
disqualified person, from providing services to a plan, unless an exemption applies. Because “parties
in interest” include service providers, all service providers effectively must rely on ERISA section
408(b)(2) (and its Code counterpart, section 4975(d)(2)) to break this circularity.2 ERISA section
408(b)(2) requires in part that service arrangements between a plan and party in interest must be
“reasonable.”
DOL regulations in effect prior to the Interim and Final Rules provided that such arrangements were
“reasonable” if (i) the services rendered were appropriate and helpful to the plan, (ii) the arrangement
was terminable by the plan without penalty on reasonably short notice, and (iii) the compensation
received by the service provider was reasonable. The Final Rule adds to these conditions by requiring
covered service providers to provide detailed disclosures to a “responsible plan fiduciary” regarding
their services, as well as the direct and indirect compensation in connection with such services.
1
See our Client Alert relating to the Interim Rule, “New Disclosure Requirements for Plan Service Providers,” (available
here).
2
All references below to ERISA are intended to include references to parallel provisions of Code section 4975(d)(2) and
the regulations thereunder.
Who Is Affected?
As discussed below, a covered service provider bears the legal burden for providing the disclosures
required under the Final Rule. The responsible plan fiduciary that receives the disclosures, however,
is expected to review and consider them in deciding whether to retain (or continue to retain) the
service provider. Accordingly, both covered service providers and responsible plan fiduciaries should
be developing appropriate, documented processes and procedures to ensure compliance with their
disclosure obligations under the Final Rule and their fiduciary obligations with respect to the selection
and retention of service providers, respectively.
The Final Rule Requirements
ERISA section 408(b)(2) requires that all “covered service providers” disclose to a “responsible plan
fiduciary” information regarding the services rendered to the “covered plan” and the “compensation”
to be received and, in some cases, paid by the covered service provider in connection with such
services.
Key Definitions Regarding Impact of Final Rule

A “covered service provider” is a service provider that enters into a contract or arrangement with a
covered plan and reasonably expects to receive $1,000 or more in:
(i) direct or indirect compensation for providing (A) services as a fiduciary (within the meaning of
ERISA) or as a registered investment adviser directly to a covered plan, or (B) fiduciary
services (within the meaning of ERISA) to an entity that holds plan assets, or (C)
recordkeeping or brokerage services in connection with making available any “designated
investment alternative,” as defined below, or
(ii) indirect compensation for certain other services, such as accounting, banking, consulting,
custodial, recordkeeping or brokerage services, provided to the covered plan.
In determining whether a service provider receives $1,000 or more in compensation, the focus is
whether $1,000 or more is expected to be received in connection with the provision of services to
the plan, regardless of the stated term of the contract (i.e., this is not strictly an annual
determination). The DOL specifically identified trailing commissions, which may be paid after
the services have been furnished, as being considered paid “in connection with” the services and
includible in the relevant calculation.
A service provider may not avoid the disclosure requirements by having services performed by an
affiliate or subcontractor. If a service provider has a contract or arrangement with a covered plan
and meets the compensation threshold, the service provider must provide the required disclosures,
even if the services are performed by an affiliate or subcontractor.
For purposes of category (A) above, service providers providing fiduciary services to “plan-asset
vehicles” (such as collective trust funds or private investment funds in which 25% or more of any
class of equity interests are held by ERISA plans) in which plans make a direct equity investment
are covered service providers. In contrast, service providers to funds (such as mutual funds and
other registered investment companies) whose assets are not treated as “plan assets” are not
covered service providers, regardless of whether the fund is included as an investment option
under a plan.
2
 A “covered plan” generally is any employee pension benefit plan within the meaning of ERISA
section 3(2)(A). Thus, the Final Rule does not apply to services provided to: (i) health savings
accounts, (ii) plans that provide benefits only to a business owner and his or her spouse, or
(iii) plans covering only self-employed individuals (e.g., Keogh or “HR-10” plans).
The Final Rule explicitly excludes plans or arrangements not covered by ERISA, such as
simplified employee pension arrangements under Code section 408(k), simple retirement accounts
under Code section 408(p), individual retirement accounts under Code section 408(a), and
individual retirement annuities under Code section 408(b). The Final Rule also excludes certain
other plans, such as government plans excepted from ERISA by ERISA section 4(b) and certain
annuity contracts and custodial accounts under Code section 403(b) that consist exclusively of
“frozen” contracts or accounts for which DOL has provided reporting relief under the Form 5500
requirements.3

A “responsible plan fiduciary” is a plan fiduciary with the authority to enter into or extend or
renew the contract and arrangement with the covered service provider. In most cases, a
“responsible plan fiduciary” will be the plan sponsor or plan administrator.

The Final Rule imposes certain investment-related disclosures with respect to a “designated
investment alternative.” A “designated investment alternative” means any investment alternative
designated by the covered plan into which plan participants and beneficiaries may direct the
investment of assets held in, or contributed to, their individual plan accounts. Significantly, a
designated investment alternative does not include brokerage windows, self-directed brokerage
accounts, or other arrangements that permit plan participants and beneficiaries to select
investments beyond those designated by the covered plan.
Required Written Disclosures
A covered service provider must provide the following written disclosures to a responsible plan
fiduciary:

A description of the services to be provided to the covered plan.

A statement, if applicable, that the covered service provider, an affiliate, or a subcontractor
expects to provide services to the plan as a fiduciary (within the meaning of ERISA) or as a
registered investment adviser.

A description of all direct compensation that the covered service provider receives or reasonably
expects to receive from the covered plan.
Direct compensation is any payment made directly by the plan for services rendered to the plan.
Direct compensation includes reimbursement received by the covered service provider from the
covered plan (including fees paid by the sponsor that are reimbursed by the plan).

A description of all indirect compensation that the covered service provider receives or reasonably
expects to receive in connection with its services to the covered plan.
Indirect compensation generally is compensation received from any source other than the plan, the
plan sponsor, the covered service provider, an affiliate, or subcontractor. Indirect compensation
includes, for example, soft dollars, Rule 12b-1 fees, referral fees and other fees received by the
covered service provider in connection with its services to the covered plan.
3
See DOL Field Assistance Bulletins 2010-01 (Feb. 17, 2010) and 2009-02 (July 20, 2009).
3
A covered service provider receiving indirect compensation must: identify the services for which
the compensation is or will be received; identify the payer of the indirect compensation; and (in a
modification of the Interim Rule) describe the arrangement between the payer and the covered
service provider (or its affiliate or subcontractor) pursuant to which such compensation is paid.
The description provided by the covered service provider must be sufficient for a responsible plan
fiduciary to understand the services provided and the relationships among the parties to the
indirect compensation arrangement.
Responding to comments on the Interim Rule expressing concern about the ability of a service
provider (such as a broker-dealer) to identify the payer of indirect compensation in advance, the
DOL indicated in the preamble to the Final Rule that a covered service provider may describe
indirect compensation in general terms, as long as the description includes enough information to
permit a responsible plan fiduciary to evaluate the reasonableness of the indirect compensation in
advance of entering into the arrangement with the service provider. In particular, the DOL noted
that the description may provide information that would enable a responsible plan fiduciary to
compare the expected compensation with that received by competing covered service providers
for similar services.

A description of any compensation that will be paid among the covered service provider, an
affiliate, or a subcontractor with respect to the services, if the compensation is either:
-- set on a transactional basis (such as commissions, finder’s fees or similar incentive
compensation) or
-- charged directly against the covered plan’s investment and reflected in the net value of the
investment (such as Rule 12b-1 fees).
This description also must describe the services for which the compensation will be paid and
identify the payer and recipients of such compensation (including the status of a payer or recipient
as an affiliate or subcontractor of the covered service provider).

A description of any compensation to be received upon the termination of the contract or
arrangement.

A description of the manner in which the compensation will be received.

Upon written request of a responsible plan fiduciary, any other information related to the
compensation received by the covered service provider in connection with the contract or
arrangement necessary for the covered plan to comply with its reporting and disclosure obligations
under ERISA.
Special Compensation-Related Disclosure for Certain Recordkeepers

If a covered service provider expects to provide recordkeeping services without explicit
compensation, or if the compensation is offset or rebated based on other compensation received by
the covered service provider (or an affiliate or subcontractor), the covered service provider must
furnish a “reasonable and good faith estimate” of the cost of such recordkeeping services,
including an explanation of the methodology and assumptions it used to prepare the estimate.
These requirements reflect the DOL’s view that information related to recordkeeping services
should be disclosed in a “meaningful way” that permits a responsible plan fiduciary to make
“informed evaluations” of the plan’s recordkeeping costs.
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Additional Investment-Related Disclosure for Fiduciaries to Plan-Assets
Investments

A covered service provider who provides services as a fiduciary to a plan-assets investment
contract, product or entity in which a covered plan has a direct equity interest also must provide:
(i) a description of any compensation that will be charged directly against the plan’s investment,
such as commissions, sales charges, redemption fees, and surrender charges, and is not
included in the annual operating expenses of the investment contract, product or entity;
(ii) a description of the annual operating expenses (e.g., the expense ratio) if the return is not fixed
and a description of any ongoing expenses in addition to annual operating expenses, or if the
contract, product or entity is a “designated investment alternative,” the total annual operating
expenses (expressed as a percentage); and
(iii) if the contract, product or entity is a “designated investment alternative,” any other
information about the designated investment alternative that is “within the control of, or
reasonably available to the covered service provider” and required by the plan administrator to
be provided under specified provisions of the participant-level disclosure regulation. These
incorporated participant-level disclosures include the following regarding the designated
investment alternative: identifying information; performance; performance benchmarks; and
fee and expense information.
The fiduciary service provider need not provide any of the foregoing information if a covered
service provider who provides recordkeeping or brokerage services through which one or more
designated investment alternatives are made available discloses the information to a responsible
plan fiduciary, as discussed in the section below.
Additional Investment-Related Disclosure for Recordkeepers and Brokers Who
Make Designated Investment Alternatives Available

A covered service provider who provides recordkeeping or brokerage services in connection with
making available any “designated investment alternative” must provide any other information
about the designated investment alternative that is “within the control of, or reasonably available
to the covered service provider” and required by the plan administrator to be provided under
specified provisions of the participant-level disclosure regulation.
These are the same incorporated participant-level disclosures that apply to certain fiduciary
service providers as described above and include the following information regarding the
designated investment alternative: identifying information; performance; performance
benchmarks; and fee and expense information.
The covered recordkeeper or broker may comply with these investment-related disclosure
requirements by providing the current disclosure materials of the issuer of the designated
investment alternative, or information replicated from such materials, so long as:
(i) the issuer is a registered investment company, an insurance company qualified to do business
in any State, an issuer of a publicly traded security, or a financial institution supervised by a
State or federal agency; and
(ii) the covered service provider acts in good faith, does not know that the materials are
incomplete or inaccurate and provides the responsible plan fiduciary with a statement that the
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covered service provider is making no representations as to the completeness or accuracy of
such materials.
If, however, the covered recordkeeper or broker is an affiliate of the issuer, it may still use the
issuer’s materials to satisfy its disclosure requirements but would retain liability for the
completeness and accuracy of such information.
Timing of Disclosures
Initial Disclosures
As indicated above, the first disclosures are due on or before July 1, 2012. Thereafter, a covered
service provider must disclose the required information “reasonably in advance” of the date the
contract or arrangement is entered into, and extended or renewed. The DOL declined to define
specifically when an arrangement is considered to be “entered into,” indicating this should be
determined based on the surrounding facts and circumstances and the nature of the arrangement. The
DOL also declined to further explain what constitutes “reasonably in advance,” stating that the
covered service provider and a responsible plan fiduciary should be able to determine what is
reasonable in this context.
Disclosure of Changes
The covered service provider must disclose a change to the initial information disclosed not later than
60 days from the date on which the provider is informed of such change, except where providing such
disclosure is impossible due to extraordinary circumstances beyond the service provider’s control.
The Final Rule applies no materiality standard with respect to changes. Nevertheless, in response to
concerns expressed by commenters on the Interim Rule that it could be read to require virtually
ongoing disclosure updates since plans typically offer a large number of designated investment
alternatives and minor modifications to such alternatives could occur almost daily, the Final Rule
requires only annual disclosure of changes to the information relating to designated investment
alternatives.
Information Requested by Responsible Plan Fiduciary
If a responsible plan fiduciary makes a written request for additional compensation-related
information needed to comply with its reporting and disclosure obligations, the covered service
provider must provide the information “reasonably in advance” of the date on which the plan fiduciary
must comply with the applicable reporting or disclosure requirements. If providing the information is
precluded due to extraordinary circumstances beyond the service provider’s control, it must be
disclosed as soon as practicable.
Failure to Comply with the Final Rule; Termination of the Arrangement
General
The failure of a covered service provider to comply with the requirements of the Final Rule may result
in the failure of the service contract or arrangement to satisfy the “reasonable” requirement of ERISA
section 408(b)(2) and, therefore, result in a prohibited transaction. The responsible plan fiduciary also
could be in breach of its fiduciary duty under ERISA if it continues to engage the covered service
provider.
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Disclosure Errors
The Final Rule provides that a covered service provider’s error or omission, made in good faith and
with reasonable diligence, with respect to required information will not cause a contract or
arrangement to fail to be “reasonable” if the covered service provider discloses the correct information
to a responsible plan fiduciary within 30 days of learning of such error or omission.
Exemption for Responsible Plan Fiduciary
The Final Rule provides an exemption from the prohibited transaction provisions of ERISA for a
responsible plan fiduciary that would otherwise apply in the event a covered service provider fails to
provide the required disclosures. This exemption is available only if:
(i) the responsible plan fiduciary did not know that the covered service provider failed, or would
fail, to make the required disclosures and reasonably believed that the service provider
disclosed the required information;
(ii) upon discovering that the covered service provider has failed to provide the required
disclosures, the responsible plan fiduciary requests such disclosures in writing; and
(iii) upon the covered service provider’s failure to provide the requested disclosures within 90 days
of the written request, the responsible plan fiduciary provides written notice to the DOL of the
failure, including other prescribed information.
In addition, if the requested information is not provided within the 90-day period, the
responsible plan fiduciary must determine whether to terminate or continue the contract or
arrangement consistent with its duty of prudence. If the requested information relates to future
services and is not “disclosed promptly after the end of the 90-period,” the responsible plan
fiduciary shall terminate the contract or arrangement as “expeditiously as possible,” consistent
with the duty of prudence.
Miscellaneous Clarifications
In the preamble to the Final Rule, the DOL also clarified certain aspects of the Final Rule:

Arrangements with Multiple Parties – The DOL stated in the preamble that the party
responsible for making the required disclosures under the Final Rule, i.e., the covered service
provider, is the party entering into the contract or arrangement with the plan, even if other parties
perform some of the services.
The DOL provided an example of a recordkeeper that enters into a contract with a plan to furnish
recordkeeping services and to make available a platform of investment options. The recordkeeper
outsources some of the recordkeeping and administrative services and pays transaction-based
compensation to an affiliated third-party administrator that has no separate contract or
arrangement with the plan. In this “bundled” arrangement scenario, the recordkeeper would be the
covered service provider and would be required to provide the necessary disclosures, including a
description of the services performed by, and any compensation paid by the recordkeeper to, the
third-party administrator.

Coordination with the Prudent Man Standard – The DOL noted in the preamble to the Final
Rule that the disclosure requirements of the Final Rule are independent of the general standards of
fiduciary responsibility set forth in ERISA section 404.
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Accordingly, a covered service provider may not rely on the Final Rule to decline to provide
additional information a responsible plan fiduciary believes is necessary in order to analyze the
covered service provider’s contract or arrangement. Moreover, a responsible plan fiduciary may
not rely on the Final Rule to determine if it has satisfied its obligations for gathering necessary
information about a covered service provider. If additional information, beyond that required by
the Final Rule, is needed, the responsible plan fiduciary must request, and the covered service
provider must provide, such information. Although the plan fiduciary’s failure to make such a
request may not result in a prohibited transaction, it may involve a breach of fiduciary duty.

Use of Estimates and Ranges in Compensation Disclosures – The preamble to the Final Rule
states that a covered service provider may disclose compensation or cost of services as a monetary
amount, a formula, a percentage of the covered plan’s assets, or a per capita charge for each
participant or beneficiary or, if the compensation cannot be reasonably expressed in such terms, by
any other reasonable method.
The DOL states that the description may include a reasonable and good faith estimate if the
covered service provider cannot otherwise describe such compensation or cost and the covered
service provider explains the methodology and assumptions used in making the estimate. The
DOL makes clear that the Final Rule permits use of estimates by all covered service providers, not
just those providing recordkeeping services, as was suggested in the Interim Rule. The DOL also
stated that compensation disclosed in the form of ranges may be considered reasonable under
certain circumstances.

Form of Disclosures – The DOL declined to mandate a particular format for the required
disclosures. However, the DOL included a “Sample Guide to Initial Disclosures” as an appendix
to the Final Rule, providing an illustration of how a covered service provider might comply with
the disclosure requirements in a lower-cost manner. The Sample Guide functions like a table of
contents and permits the covered service provider to respond to the various disclosure
requirements by citing to applicable sections in the relevant contract or agreement or related
documents.
The DOL indicated that it intends to propose a form or format by which the required disclosures
must be made. Pending adoption of any such prescribed form, the DOL encouraged covered
service providers to use the Sample Guide.

Electronic Delivery of Disclosures – The DOL affirmed that the Final Rule does not preclude
electronic delivery of the required disclosures, including making such disclosures available on a
secure Website, so long as the responsible plan fiduciaries are notified how to access the
information.

Welfare Plans – The Final Rule does not apply to welfare benefit plans subject to ERISA. The
DOL reserved a paragraph in the Final Rule to provide a comprehensive disclosure framework
applicable to contracts or arrangements with welfare benefit plans, which remains pending under a
separate project within the DOL.
Please contact any member of the ERISA Fiduciary Group listed below if you want to discuss any of
these or other issues raised by this Client Alert, or if you have further questions.
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Contacts:
Catherine S. Bardsley
John J. Nestico
William A. Schmidt
Allison Wilkerson
catherine.bardsley@klgates.com
+1.202.778.9289
john.nestico@klgates.com
+1.704.331.7529
william.schmidt@klgates.com
+1.202.778.9373
allison.wilkerson@klgates.com
+1.214.939.6282
Mark J. Duggan
David E. Pickle
William P. Wade
Kristina M. Zanotti
mark.duggan@klgates.com
+1.617.261.3156
david.pickle@klgates.com
+1.202.778.9887
william.wade@klgates.com
+1.310.552.5071
kristina.zanotti@klgates.com
+1.202.778.9171
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