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CCH® PENSION — 02/15/12

EBSA final regs require service providers to furnish detailed fee disclosures to plan fiduciaries

The Employee Benefits Security Administration (EBSA) has issued final regulations that are designed, effective July 1, 2012, to provide plan fiduciaries with sufficient information to evaluate the reasonableness of compensation and fees directly and indirectly paid to certain service providers (including affiliates), and assess the potential for conflicts of interest that may affect the performance of a service provider. A service contract or arrangement would not be reasonable, for purposes of the prohibited transaction exemption authorized under ERISA for necessary plan services, unless covered service providers (including fiduciary service providers, banks, consultants, investment providers, and third party administrators) complied with a series of new disclosure requirements. EBSA published interim final regulations on July 16, 2010, effective July 16, 2011. The final regulations replace the interim rules with minor changes and revisions which clarify the applicable requirements.

CCH Note: The new regulations are part of an overall initiative announced by the Administration designed to enhance retirement security. Separately, the Treasury Department has issued two proposed regulations and two revenue rulings aimed at reducing regulatory burdens and making it easier for retirees to choose to receive their benefits as lifetime income streams.

The rules generally require disclosure of services to be provided to a plan by a covered service provider and compensation (direct and indirect) to be received by the provider. Covered providers would be further required to furnish information regarding investments with respect to which they are fiduciaries or provide recordkeeping and brokerage services.

Absent compliance by the service provider with the disclosure requirements, the plan fiduciary would be subject to liability for engaging in a prohibited transaction. However, the DOL has incorporated a Class Exemption into the final regulations that would relieve a fiduciary (but not the service provider) of liability for a prohibited transaction resulting from a service provider's failure to comply with the notice requirements. The fiduciary may not have had knowledge of the service provider's compliance failure and would be required to take actions upon discovering the failure, including notifying the DOL.

It is important to note that the disclosure requirements under ERISA §408(b) are independent of a fiduciary's general obligations under ERISA §404(a). Thus, compliance with the ERISA §408(b)(2) regulations will not relieve a plan fiduciary of the need to prudently select and monitor service providers.

Plans covered by the new disclosure rules include pension plans (defined contribution and defined benefit) within the meaning of ERISA §3(2)(A), excluding SEPs, SIMPLE Plans, and IRAs.

Covered service providers

Not every entity providing services to the plan would be covered by the new rules. Accordingly, the threshold determination under the final rules will be whether a service provider is subject to the disclosure requirements.

Service providers subject to the disclosure requirements would be restricted to those who have entered into a contract or arrangement with a covered plan and reasonably expect $1,000 or more in compensation (direct or indirect) to be received in connection with the provision of specified services, regardless of whether the services will be performed, or such compensation received by the covered service provider, affiliate or subcontractor. The $1,000 threshold is not tied to a percentage of plan assets or subject to cost-of-living adjustments. Note further that the compensation threshold is not measured over a calendar or plan year or during the term of the contract. The focus is on whether the threshold amount is expected to be received for the services specified in the contract.

The final regulations designate the following three categories of service providers as being subject to the disclosure requirements:

1. Service providers who provide services to the plan as a fiduciary under ERISA §3(21) as an investment adviser registered under the Investment Advisers Act of 1940 or any state law.
2. Providers of recordkeeping or brokerage services to covered individual account plans that permit participants or beneficiaries to direct the investment of their accounts, if one or more designated investment alternatives will be made available through a platform of investment options or a similar mechanism, in connection with the recordkeeping or brokerage services (i.e., "platform providers").
3. Service providers (including an affiliate or subcontractor) who reasonably expect to receive indirect compensation or compensation from related parties in connection with accounting, auditing, actuarial, appraisal, banking, consulting, custodial insurance, investment advisory (whether or not the service provider is registered), legal, recordkeeping, securities or other investment brokerage, third party administration, or valuation services provided to the covered plan.

Disclosure of compensation and fees

The primary focus of the final regulations is on highlighting the compensation or fees received by service providers and their affiliates in connection with services provided to the plan. The regulations specify the following four categories of compensation to be disclosed:

1. Direct compensation (either in the aggregate or by service (i.e., itemized basis)) that the service provider, affiliate or subcontractor reasonably expects to directly receive from the covered plan in connection with covered services.
2. Indirect compensation that the covered service provider, affiliate or subcontractor reasonably expects to receive from a source other than the plan, plan sponsor, covered service provider, or affiliate in connection with the services to be provided pursuant to the contract. Note that compensation received from a subcontractor would be indirect compensation, unless received in connection with services performed under a subcontractor's contract or arrangement. The disclosure must further identify the services for which the indirect compensation will be received, identify the payer of the indirect compensation, and describe the arrangement between the payer and the covered service provider (affiliate or subcontractors) pursuant to which the indirect compensation is to be paid.
3. Compensation paid among related parties (i.e., covered service providers, affiliates and subcontractors) that is: (a) set on a transaction basis (e.g., commissions, soft dollars, finder's fees or other similar incentive compensation based on business placed or retained), or (b) charged directly against the covered plan's investments and reflected in the net value of the investment (e.g., 12b-1 fees). In addition, the service provider must identify the services for which the compensation will be paid, the recipients of the compensation, and the status of each payer or recipient as an affiliate or subcontractor. However, the disclosure requirement does not extend to compensation received by employees from their employers for work performed by the employee.
4. Compensation that the covered service provider, affiliate, or subcontractor reasonably expect to receive in connection with the termination of the contract and the means by which any pre-paid amount will be calculated and refunded upon such termination.

Compensation would include "anything of monetary value" (e.g., money, gifts, awards, and tips) with the exception of non-monetary compensation valued at $250 or less, in the aggregate, during the term of contract (and not over a calendar or plan year). A description of compensation or cost may be expressed as a monetary amount, formula, percentage of the covered plan's assets, or a per capita charge for each participant or beneficiary. In the event the compensation or cost cannot be reasonably expressed in such terms, any other reasonable method may be used. A reasonable means of disclosing compensation or costs, EBSA advises, would be through a range (e.g., range of possible basis points).

The description may also include a reasonable and good faith estimate in the event the covered service provider cannot otherwise readily describe compensation or costs and the service provider explains the methodology and assumptions used to prepare the estimate. Thus, all covered service providers (not just those providing recordkeeping services) may provide estimates of monetary amounts.

However, EBSA stresses, information must be described (under any method selected) in a manner and with sufficient detail (e.g., by disclosing assumptions used in a formula) that will allow the responsible plan fiduciary to determine whether the disclosed compensation and costs are reasonable.

Investment disclosure

Covered service providers who furnish services as a fiduciary to an investment contract, product, or entity that holds plan assets and in which the plan has a direct equity investment must (in addition to compensation covering the services provided) disclose compensation regarding the investment with respect to which they are a fiduciary (or provide recordkeeping or brokerage services).

The information to be disclosed includes:

1. compensation to be charged directly against an investment, such as commissions, sales loads, sales charges, deferred sales charges, redemption fees, surrender charges, exchange fees, account fees, and purchase fees, and that is not included in the annual operating expense of the investment contract, product or entity; and
2. annual operating expenses (e.g., expense ratio) if the return is not fixed, and ongoing expenses in addition to annual operating expenses (e.g., wrap fees, mortality and expense fees), or for an investment contract, product or entity that is a designated investment alternative, the total annual operating expenses (as a percentage and calculated in accordance with the participant-level disclosure rules of ERISA Reg. §2550.404a-5(h)(5)).

The investment disclosure requirements apply to covered service providers of recordkeeping and brokerage services to individual account plans that allow participants and beneficiaries to direct the investment of their accounts, if one or more designated investment alternatives will be made available in connection with the services. The required information must be provided with respect to each designated investment alternative for which recordkeeping or brokerage services will be provided pursuant to the contract or arrangement with the covered plan.

Class PT exemption

In the event that a service provider fails to comply with the disclosure requirements, the service contract will not qualify for the exemptive relief under ERISA §408(b)(2), and the plan fiduciary would be liable for a prohibited transaction under ERISA §406. The DOL, concurrently with the issuance of the proposed disclosure regulations, released a separate Proposed Prohibited Transaction Class Exemption that would relieve a plan fiduciary of liability for a prohibited transaction that results from the failure by a service provider to comply with the disclosure regulations. The DOL has now adopted the Class Exemption, with modifications, and incorporated it into the final rules as a statutory exemption.

The Class Exemption shields a responsible plan fiduciary from the restrictions of ERISA §406(a)(1)(C) and (D) following the failure of a covered service provider to comply with the disclosure requirements if:

1. the fiduciary did not know that the covered service provider failed or would fail to make a required disclosure and reasonably believed that the provider made the required disclosure;
2. the responsible plan fiduciary, upon discovering the failure of the covered service provider to disclose the required information, makes a written request for the information to the service provider; and
3. the fiduciary notifies the DOL of the service provider's failure to comply within 90 days with the written request for information.

The notice to the DOL must contain specified identifying information and must indicate the date of the written request for information and whether the covered service provider continues to provide services to the plan. The notice must be filed with the DOL no later than 30 days following the earlier of: (a) the service provider's refusal to furnish the requested information, or (b) 90 days after the written request for information is made. The DOL has also provided a sample notice, which is available on the Department's website at: http://www.dol.gov/ebsa/DelinquentServiceProviderDisclosureNotice.doc.

Effective date

The final rules will be effective July 1, 2012. It is important to note that contracts or arrangements in existence prior to July 1, 2012 must also be brought into compliance by that date.

CCH Note: EBSA advises that the July 1, 2012 effective date of the fee disclosure rules under ERISA §408(b)(2) will also impact the date by which participant-level disclosures must be made. Accordingly, for calendar year plans, the initial annual disclosure of plan-level and investment-level information (including associated fees and expenses) must be furnished no later than August 30, 2012 (60 days after the July 1 effective date of the ERISA §408(b)(2) regulations). The first quarterly statements must be then furnished no later than November 14, 2012 (45 days after the end of the third quarter (July-September) during which initial disclosures were first required). EBSA explains, however, that this quarterly statement need only reflect the fees and expenses that were actually deducted from the participant's or beneficiary's account during the July-September quarter to which the statement relates.

Source: 77 FR 5632, February 3, 2012.

For more information, visit http://www.wolterskluwerlb.com/rbcs.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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