In 1974, Congress passed the Employee Retirement Income Security Act (ERISA). ERISA set thresholds for employers sponsoring group plans (plan sponsors) to protect participating employees and beneficiaries (plan participants).

The foundation of ERISA is simple: Plan sponsors and fiduciaries have a fiduciary duty to act prudently and solely in the interest of plan participants. They must only pay reasonable fees and expenses for services other parties perform.

But as the employee benefits space grew, it became clear that ERISA wasn’t enough. Retirement and pension plan sponsors were lacking the necessary information to make prudent decisions about reasonable fees and expenses.

In 2012, the Department of Labor (DOL) issued regulations requiring retirement plan service providers to disclose indirect and direct compensation and potential conflicts of interest. The “408(b)(2) regulation” aimed to protect plan participants by giving retirement plan fiduciaries the information they needed to assess the reasonableness of fees.

The rise of lawsuits

Despite the 408(b)(2) regulation, there was a notable increase in litigation against plan fiduciaries.

Many of these lawsuits related to excessive fees and failure to monitor service provider arrangements adequately. They often alleged that fiduciaries failed to ensure plan participants were not overcharged due to hidden fees or conflicts of interest. They claimed this failure led to significant financial losses for plan participants.

As a result, the regulatory environment and judicial system highlighted the need for even greater transparency and accountability in retirement plans, as well as group health plans. The lessons learned from retirement plan litigation emphasized the importance of detailed disclosures and vigilant fiduciary oversight.

Enter Section 202 of the Consolidated Appropriations Act

In 2021, the Consolidated Appropriations Act (CAA) introduced Section 202, extending similar transparency requirements to group health plans.

Section 202’s service provider compensation disclosures mandate that service providers disclose any direct or indirect compensation they receive if they expect to receive $1,000 or more. The goal is to ensure that plan fiduciaries have sufficient information to assess the reasonableness of fees and identify potential conflicts of interest.

Section 202 requires detailed disclosures, including:

• Description of services: A clear description of all services provided to the plan
• Fiduciary status: A statement indicating whether the service provider is acting as a fiduciary
• Direct and indirect compensation: Detailed information on all compensation received, both direct (paid by the plan) and indirect (paid by third parties)
• Transaction-based compensation: Disclosure of any compensation received in connection with specific transactions involving the plan
• Compensation among related parties: Information on any compensation arrangements between related parties

Greater transparency equals greater protection for plan participants

Section 202 of the CAA represents a significant step toward greater transparency in the administration of group health plans. By requiring comprehensive disclosures from service providers, it empowers plan fiduciaries to make informed decisions, protect plan participants from excessive fees, and minimize conflicts of interest.

The shift mirrors the developments seen in the retirement plan sector. It reflects a trend toward enhancing fiduciary accountability and participant protection across all types of employee benefit plans.

Seek counsel as needed

If you have questions about disclosure statements, contact your benefits adviser for clarification and guidance.