The U.S. Department of Labor recently issued new regulations aimed at bringing transparency to employer-sponsored benefit plans. Though much of the debate over enhanced fee disclosure has revolved around the impact new rules will have on the service providers who must do the disclosing, plan sponsors have also recognized that, if finalized without change, these proposed rules will affect them too.

Employers who sponsor some of the more complicated employee benefit plans, such as 401(k) plans or health plans, are at the mercy of service providers. These plans are so complex that most employers are forced to rely heavily on the expertise of these vendors. Sponsors have the legal duty to properly select and monitor the service providers, including assuring that only reasonable compensation is paid for their services.

But that is a daunting task. Plan sponsors have a hard time figuring out just how much compensation their service providers receive from the employer's plans, whether any payments are being paid by third parties related to their plans, and whether any payments to consultants and advisors may not be in the best interests of the plans.

Employers Must Know More

That is all supposed to change under the proposed DOL rules. Service providers will be required to disclose all direct and indirect compensation they receive from any party related to the plans they service. They will be required to regularly report this compensation and notify plan sponsors when compensation changes. But this new transparency does not come without a cost to employers.

The most obvious effect is that plan sponsors will need to review all of this newly disclosed information to determine whether the amount of compensation is reasonable. This may not be easy, given that many employers won't even understand the nature of much of the compensation being disclosed. For example, it will be incumbent upon the 401(k) plan sponsor to understand what is reasonable for 12b-1 fees, sub-transfer agent fees, finder's fees, soft dollars and others, and whether the parties to whom they are paid have a conflict.

Once the plan sponsor determines that the compensation is reasonable, it must then enter into a written contract for those services. Though it is typical for plans to have written contracts with third-party administrators, it may not be so typical to have written arrangements with consultants, advisors, accountants and attorneys (which will be required if they receive something called "indirect compensation").

All contracts with service providers must include six specific terms: a description of the fees and manner of receipt; acknowledgement of fiduciary status, if the service provider will be a fiduciary; whether the service provider expects to have or acquire a financial interest in any transaction involving the plan; whether the service provider has a material relationship with another party which will cause a conflict of interest; whether the provider can affect its own compensation without prior approval of a fiduciary; and a listing of the provider's conflict-of-interest policies.

Reporting Adds Another Burden

Once these contracts are in place, service providers will be obligated to regularly report to plan sponsors ongoing information with regard to their compensation. What's the challenge for employers? If the service providers fail to live up to their new reporting obligations, the plan's fiduciaries must demand that the provider come into compliance. If the provider fails to do so, the employer is obligated to report these failures to the DOL, or risk being held jointly liable for penalties related to the provider's failures.

So, plan sponsors are just as much a part of these new rules as service providers are--and they know it, based on comments submitted to the DOL by employers and their trade associations. The new disclosure rules will require that they actually use this newly disclosed data; that their contracts must reflect the duties related to this new data; that they monitor service provider compensation; and, finally, that they report a service provider's failures.

It is not at all clear, however, that the DOL will heed the concerns being raised by employer groups. Given the very public and open way in which these proposed regulations were developed (DOL officials floated trial balloons on fee disclosure as early as 2005), the spirited debate over similar fee disclosure issues involved with the Form 5500 revisions, and the fact that the DOL set an aggressive effective date of the proposed regulations for 90 days after publication of the final rule, it seems clear that the DOL believes it has done all the of the heavy lifting it needs to do. The final rules will probably be largely unchanged from the proposals.

Robert J. Toth, Jr., a partner with Baker & Daniels LLP, counsels national clients on employee benefits and executive compensation. Founded in 1863, Baker & Daniels LLP is one of Indiana's largest law firms.