5500 Preparer's Manual for 2012 Plan Years
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From Spencer's Benefits Reports: In comments submitted on February 11 to the Department of Labor’s Employee Benefits Security Administration (EBSA), a number of employee benefits groups called for a number of changes in the EBSA’s proposed regulations on 401(k) plan fee disclosure to enhance the ability of plan fiduciaries “to gain accurate information regarding plan fees in a meaningful, useful form.” The comments were submitted by the ERISA Industry Committee, the College and University Professional Association for Human Resources, the National Association of Manufacturers, the Profit Sharing/401(k) Council of America, the Society for Human Resource Management, and the U.S. Chamber of Commerce.
On Dec. 13, 2007, the EBSA issued proposed regulations under ERISA Sec. 408(b)(2) that would require that contracts and arrangements between employee benefit plans such as 401(k) plans and service providers include provisions to ensure the disclosure of information to assist plan fiduciaries in assessing the reasonableness of the compensation or fees paid for services that are rendered to the plan and the potential for conflicts of interest that may affect a service provider’s performance of services. The proposed regulations would redefine what constitutes a “reasonable contract or arrangement” for purposes of the statutory exemption from certain prohibited transaction provisions of ERISA.
In their comments, the benefits groups initially observe, “We believe that the final rule should assure effective disclosure of useful and material information to responsible plan fiduciaries. There is a tremendous range in the resources available to responsible plan fiduciaries when evaluating plan fees. The final rule must address the needs of the least-sophisticated plan sponsors while not overburdening either them or the most sophisticated plan sponsors.”
Among the specific changes to the proposed regulations requested by the benefits groups are the following:
The final regulations should not apply to welfare plans. “We recommend that 2550.408b-2(c)(1) be limited to pension plans,” the groups state. “We are not aware of a need to increase the transparency of fees related to welfare plans. It does not appear that a substantive record has been created demonstrating the need for such regulation in the health benefits marketplace. The majority of contracts and policies for welfare plan benefits or services are between a service provider and a plan sponsor, not a plan. So long as the plan sponsor does not pay fees from plan assets, section 408(b)(2) does not apply.”
The final regulations should clarify the disclosure of investment management fees. According to the benefits groups, “Fees resulting from the investment of plan assets are, in most circumstances, the largest single expense for employer-provided retirement plans. It is imperative that the proposed rule provides full disclosure of all investment-related plan fees to the degree that the Department believes that a responsible plan fiduciary has a duty to ensure that such fees are reasonable.
“The disclosure of investment-related fees presents problems that may not exist for other plan services. A primary problem is that a mutual fund investment manager is often unaware that it holds assets of a specific plan because the investments are made at an omnibus level. Additionally, in the case of a mutual fund investment, there is often no contract, arrangement, or even a direct connection between the plan and the investment manager, regardless of the investment manager’s status as a service provider under the proposed rule. While the responsible plan fiduciary selects the mutual fund investment, the link between the two parties is the intermediary responsible for operationally directing the investment of the plan assets, such as a recordkeeper, trustee, investment fiduciary, or third party administrator. These entities are considered to be service providers under the proposed rule. Sometimes the intermediaries are affiliated with the investment manager holding plan investments, but often they are not. One approach to this problem is to recognize that the intermediary will be the conduit for providing disclosure of investment-related fees to the responsible plan fiduciary under the proposed rule.”
The final regulations should establish an appropriate level of detail in disclosures. “The Department should establish a de minimus amount, expressed as a percentage of assets, for the reporting of investment-related fees and a materiality threshold for reporting plan services,” the groups assert. “We can envision situations that might require the disclosure of a large number of service providers that receive compensation as the result of their relationship with a primary service provider. While responsible plan fiduciaries need to be aware of the cost and nature of the services provided to a plan, it may not be necessary in all cases to list each component provider.”
Services provided by employers should not be subject to disclosure requirements. According to the groups, “While some in-house services, such as legal, appear to be exempt from the rule, many other services that may fall under the jurisdiction of section 2550.408b-2(c)(1)(i)(A) of the proposed rule are routinely performed by employees of the plan sponsor. For example, managing a payroll deduction process, delivering COBRA notices, and tracking records used to determine vesting might be viewed as providing recordkeeping or third party administration services. Often these in-house services do not result in any fees paid by the plan, but they do result in compensation to a service provider from the plan sponsor. Regardless, we believe that an exemption should apply as long as no indirect compensation is received.
“In addition, we interpret section 2550.408b-2(c)(1)(i)(C) to exempt providers of accounting, actuarial, appraisal, auditing, legal, or valuation services from the requirements of section 2550.408b-2(c)(1) unless they receive indirect compensation (compensation from any source other than the plan, the plan sponsor, or the service provider). We recommend that section 2550.408b-2(c)(1) should not apply to any services provided by an employee of the plan sponsor or its affiliates unless the service provider receives indirect compensation.”
Disclosures should depend upon material relationships and not “conflicts of interest.” In conclusion, the groups state, “We applaud the requirement to disclose certain relationships, but we recommend the removal of the requirement that such disclosures be contingent upon a finding of an actual or potential ‘conflict of interest.’ The conflict of interest concept is, in the scope of ERISA’s prohibited transaction rules, new and undefined. Instead, we believe a better approach is to require disclosure of ‘material’ relationships and remove the language pertaining to a conflict of interest.”
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