WASHINGTON - The Department of Labor cleared up the rules governing situations in which mutual funds can pay fees to defined contribution plan service providers.
In two opinion letters concerning Frost National Bank and a unit of Aetna Life & Casualty Co., additional guidance on defined contribution mutual fund fees, could lead to changes among defined contribution funds and defined contribution service providers.
In the letter to Frost, based in San Antonio, Texas, the DOL said it was not a prohibited transaction for Frost to receive mutual fund administrative fees, such as subtransfer and 12b-1 fees, even though the bank acts as a trustee to pension plans and directs or advises the plans to invest in such mutual funds.
Frost offset the mutual fund fees against fees paid to it by plan sponsors, effectively passing the fees on to the plans.
Similarly, the letter to Hartford, Conn.-based Aetna Life Insurance & Annuity Co. said that receipt of administrative fees in itself does not violate the Employee Retirement Income Security Act of 1974 if a fiduciary - a record keeper in Aetna's case - receives fees from a defined contribution plan mutual fund, providing the fiduciary doesn't exercise any control or discretion over how the plan assets are invested, and fees are properly disclosed.
ERISA attorneys representing defined contribution plan providers and mutual funds applauded the letters.
"We view this as a major development," said Richard Matta, counsel in the Washington office of Mayer, Brown & Platt, a law firm.
The letters strike a balance of meeting the needs of defined contribution service providers and of pension plan sponsors, Mr. Matta said.
"This is an extremely well-crafted, comprehensive guidance for us," although there are some situations that are not covered by the letters, said Thomas G. Schendt, Washington-based partner in the ERISA group of law firm Alston & Bird, Atlanta.
A big change could come from increased disclosure of fees by defined contribution service providers to pension plan sponsors.
"If there's a common theme in all of this, in at least these situations, it's disclosure, disclosure, disclosure," Mr. Schendt said.
Even though the fee disclosure should come directly from a defined contribution service provider, plan sponsors have a duty to explore all avenues for determining where fees are being paid by the plan, said Bette J. Briggs, who signed the DOL letters and is chief of the division of fiduciary interpretations in the office of regulations and interpretations.
Bruce Ashton, shareholder of the law firm Reish & Luftman, Los Angeles, Calif., said he expects the letters to lead to increased disclosure of 12b-1 and similar fees to pension plans, which might lead to the plan sponsors reviewing the terms of their defined contribution agreements.
But Mr. Ashton and others pointed out plan sponsors still carry the burden of ensuring all defined contribution plan fees are disclosed, proper and reasonable.
"Plan sponsors have a fiduciary responsibility to make sure plan assets, including fees charged to the plan, are reasonable. That hasn't changed," said David Wray, president of the Profit Sharing/401(k) Council of America, Chicago.
In a similar fashion, though, defined contribution plan service providers that previously might have avoided defined contribution plan situations that led to the payment of 12b-1 and similar fees now might be willing to go ahead with that, Mr. Matta said.
The rules have been more clearly defined, leveling the playing field among service providers, he said.
At Alston & Bird, Mr. Schendt and an associate outlined a number of recommendations to its bank clients in a recent memorandum.
Among the suggestions:
Review defined contribution alliance agreements;
avoid fiduciary status for bundled defined contribution service providers;
Confirm administrative fees paid by mutual funds to bundled providers have been disclosed and are approved by independent plan fiduciaries; and
Review the compensation arrangements between service providers and the pension plan.
Additional guidance on related issues could come from the DOL. Ms. Briggs said there have been other requests for interpretations that required more information be provided to the DOL. If that information is obtained, the department might release additional opinion letters.
She declined to comment on what type of enforcement actions, if any, would come following the letters.
Some in the industry were relieved the letters didn't follow the DOL's informal position that the receipt of 12b-1 or similar fees on its face constituted prohibited transactions, which carry heavy fines.
Cathy Heron, vice president and general counsel for the Investment Company Institute, the Washington-based mutual fund lobbying group, praised the letters. She noted a request for additional clarification from the DOL is likely to be withdrawn.