The Department of Labor released today a proposed regulation that requires certain service providers to disclose all compensation and fees to their plan fiduciary regarding services rendered to the plan. 

The DOL also wants service providers to inform fiduciaries about any possible conflicts of interest that may influence plan services. The proposed rule, if finalized, will shed light on whether plan fiduciaries are paying reasonable fees for services provided to the plan. It would affect 401(k) and other employee benefit plans. 

The tougher disclosure requirements not only apply to fiduciary service providers, but also to service providers that advise on banking, consulting, financial investments, recordkeeping and third-party administration matters. The measure also includes providers that receive indirect compensation for accounting, actuarial, appraisal, auditing, legal and valuation services. 

In addition, the proposed regulation contains an exemption clause that provides relief to plan fiduciaries that sign a service contract, but then realize the provider has failed to comply with the disclosure requirements.  

DOL estimates the cost of the proposed regulation to be $52 million in the year of implementation, but will decrease to approximately $36 million in the second year. 

"We decided a regulation was the way to go because over the last 10 to 15 years there has been an increase in the complexity of the financial service marketplace," said Bradford Campbell, assistant secretary for DOL's Employee Benefits Security Administration, during a press conference yesterday. 

While the development has resulted in many benefits to plans in terms of increased availability of services and lower prices, Campbell noted, some fee relationships and compensation arrangements have grown more complex and difficult to understand. "This regulation will help address that," he said. 

DOL views the current proposal as a larger effort to increase transparency in health and retirement plans. The department cites recent regulatory reforms to Form 5500 and an upcoming proposal on disclosure requirements by plans to participants as other initiatives encouraging financial transparency. 

Congress should consider these measures before passing legislation on 401(k) fee transparency, Campbell said. "Our three regulatory initiatives cover the waterfront of the issues that are coming up in connection with fee disclosures." Therefore, new legislation is not necessary for the DOL to address the problems, given the agency already has the statutory authority to propose such regulations, he added.  

Written comments on the proposed rule must be received by DOL on or before Feb. 11, 2008.