BNA Pension and Benefits Blog

On May 16, 2005, the SEC issued a Staff Report Concerning Examinations of Select Pension Consultants.

In connection with the SEC report, on June 1, 2005,  DOL and the SEC jointly released tips to help ERISA plan fiduciaries in selecting and monitoring fiduciaries.

The staff report and the jointly released tips focused on whether pension consultants were fully disclosing potential conflicts of interest, particularly where investment consultants' recommendations of money managers to clients might be based on financial incentives from the managers instead of the quality of the managers.

DOL has expressed concern about the difficulty that plan fiduciaries have in discerning the actual costs of services provided to 401(k) plans and has promoted on its WEB site a 401(k) Fee Disclosure Form.

DOL has in its regulatory agenda and in several public venues stated it is working on a section 408(b)(2) regulation update project. Section 408(b)(2) is a primary statutory exemption which allows service providers to provide services to ERISA plans and receive compensation for those services. It seems likely that in the revised regulation under 408(b)(2), DOL will require significant additional disclosure regarding direct and indirect compensation.

On July 21, 2006, DOL a proposed new rule for 5500 disclosure which would require plans to report insurance carriers that fail to provide required information on insurance fees and commissions. In addition, there would be expanded disclosure of direct and indirect service provider fees including revenue sharing.

Apparently, DOL is serious about increased fee disclosure by service providers. This raises some interesting questions:

Ultimately, what kind of disclosures for both 5500 reporting purposes and for compliance with 408(b)(2) will be required?

Assuming greater disclosure, will something positive come of it or will it merely add to the regulatory burden faced by ERISA plans and their service providers?

Beginning in 2003, the SEC and state officials brought enforcement actions for improper trading practices involving mutual funds. Settlements reached by the SEC and state regulators were put into what the SEC call “fair funds” to compensate investors who were harmed by the violation. A list of the fair funds can be found on the SEC website. Distribution plans for three of those funds have been published to date: Pilgrim Baxter & Associates, Columbia Management Advisors and Banc One Investment Advisors. To assist plans entitled to share in the settlements, links to the proposed distribution plans and comments are posted on the ERISA Settlements Clearinghouse website.

For each fair fund, the SEC has appointed an independent distribution consultant (IDC) to establish a plan to distribute the monies from the settlement fund to the shareholders of the relevant mutual fund or series of funds harmed by the late trading or market timing. Proposed distribution plans are published on the SEC website and there is typically a 30 day comment period following publication. The SEC is to finalize these distribution plans within 30 days after the comment period closes, but may extend the period. The 30-day comment period has ended for all of the proposed plans issued to date, so fiduciaries of plans that invested in mutual funds managed by those advisors should begin to think about how the distributions to participants should be made.

On April 19, 2006, the DOL issued Field Assistance Bulletin 2006-1, which provides useful guidance to plan fiduciaries about how proceeds from the fair funds are to be allocated. The plan fiduciaries may use the same method used by the IDC or may use any other prudent allocation method. If distributions to plan participants are not cost-effective, the plan fiduciaries may allocate them to current participants invested in the particular mutual funds or use the recoveries for other permitted purposes, such as plan expenses.