In February 2012, the Department of Labor at last published a final rule concerning the disclosures that need to be made by those who provided services to ERISA plans pursuant to ERISA section 408(b)(2). This final rule will become effective July 1, 2012: once “reasonable” contracts will become prohibited transactions thereby creating potentially significant excise tax liability; plan fiduciaries may face individual/personal liability for these excise taxes; and plan fiduciaries may face potential litigation.
Although most competent plan fiduciaries would require some kind of disclosure of fees that brokers, investment advisors, and others charge to a plan to insure that participants are going a good value. The most sweeping change this rule will have is it will allow plan fiduciaries to better determine what is a “reasonable” fee. The publicity and availability of fee rates for various service providers is directly correlated to increased value for the plans. By creating a more transparent and open market for service providers to ERISA plans, prices should depress from increased competition.
In the next year or two, there will probably be an influx of plans soliciting bids from service providers or request for proposals (“RFPs”). Additionally, there may be a retrench by ERISA plans from once coveted hedge funds that generally rely on a ‘two and twenty’ compensation structure. This ‘two and twenty’ refers to how hedge fund managers charge a flat 2% of total asset value as a management fee and an additional 20% of any profits earned. Because it may be difficult to prove that such exorbitant fees are ‘reasonable’ in light of hedge funds meager returns.
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