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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
From Spencer's Benefits Reports: In testimony at a March 31 hearing of the Department of Labor’s Employee Benefits Security Administration (EBSA), Robert Chambers, a partner in the Charlotte, N.C., law firm of Helms Mulliss & Wicker, said that “considerably more work is still required” on the proposed 401(k) plan fee disclosure regulations issued by EBSA. Mr. Chambers testified on behalf of the American Benefits Council.
Last December, 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. 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 his testimony, Mr. Chambers initially observed, “As drafted, the proposed regulation would apply broadly to defined contribution plans, defined benefit plans, and health and welfare plans.” He then urged that the EBSA “finalize the proposed regulations in three separate tranches or components—first, disclosure for defined contribution plans; second, for defined benefit plans; and finally for health and welfare plans. Our reasons for this request are as follows: Each component will require a massive and time-consuming enormous negotiated undertaking. Each type of plan is sold and serviced very differently and their fee structures are quite dissimilar. Each type of plan has distinctive legal structures. Any attempt to bring all three types of plans into compliance at the same time, especially in the breakneck fashion contemplated in the proposed regulations, will fail.”
Mr. Chambers went on to state, “The proposed regulation is silent on whether it applies to arrangements that are covered by the prohibited transaction rules of section 4975 of the Internal Revenue Code, but not by ERISA. This broad sector includes tax-qualified retirement plans that are exempt from ERISA because they cover only nonemployee business owners, IRAs, HSAs, and Coverdell education savings accounts.” He recommended that the EBSA “clarify in the final regulations that these plans are not subject to the disclosure requirements. There is no plan fiduciary involved in these arrangements; to the contrary, individuals understand that they are acting in their own stead in determining which service providers to engage and what investment decisions to make. In this sense, IRA owners and other individual arrangement owners are far more like plan participants than plan fiduciaries. It would be neither appropriate nor sensible to impose the service provider-to-plan disclosure requirements on these non-ERISA arrangements.”
“The proposed regulation implies that any violation of the requirements, no matter how minor, will result in a prohibited transaction and excise tax,” Mr. Chambers continued. “This structure would benefit greatly from a correction mechanism that provides a means of dealing with reasonable errors without draconian penalties. In addition, there will be times when a bundled service provider is unable, despite diligent efforts, to obtain accurate information needed for disclosure from the other parties to its bundle.” He urged the EBSA to create a class prohibited transaction exemption for such situations similar to the prohibited transaction exemption provided for plan fiduciaries that are unable to obtain necessary information from their service providers.
According to Mr. Chambers, “The proposed regulation appears to provide that its disclosure requirements apply not only where a plan pays for services, but also where the employer that sponsors the plan pays for services out of its general assets. ERISA regulates only the amount that a plan pays for services. It does not regulate the amount that the plan sponsor directly pays for services. For these reasons, the Council strongly recommends clarifying that the proposed regulation does not apply where a plan service is paid for entirely out of the plan sponsor’s general assets.”
With respect to conflicts of interest, Mr. Chambers cited two “puzzling” aspects of the proposed regulations. “The first relates to a service provider’s ability to affect its own fees,” he stated. “We understand that, where a service provider uses its powers in a discretionary manner to affect its own compensation, the service provider is functioning as a fiduciary and has committed a prohibited transaction. If this is correct, what must be disclosed under this rule? Only prohibited transactions? Or is the proposed regulation intended to implicitly overrule the Department’s prior position that a service provider’s ability to affect its own compensation is a prohibited transaction?
“The requirement to disclose conflicts of interest is also puzzling. A conflict of interest can only arise where a service provider is acting as a fiduciary in providing a service, such as advice, with respect to which the service provider could be seen to have divided loyalties or interests that are contrary to the plan’s interests. In such cases, the existence of a conflict of interest generally gives rise to a prohibited transaction. Where the service provider is not acting as a fiduciary, the service provider is simply selling a service in an arm’s length transaction; no fiduciary duty of loyalty to the plan exists and, accordingly, no conflict of interest can exist. In this context, what must be disclosed under the proposed regulation? Only prohibited transactions for which there is no exemption?”
Finally, Mr. Chambers expressed concern about the proposed effective date of 90 days after publication of final regulations: “The 90-day time period is simply not sufficient for service providers because the rule, as proposed, would require significant modifications to computer systems, the training of operational and administrative staff, the preparation of new communication and administrative materials for plan fiduciaries, as well as the development of actual disclosure documents.” He recommended that the final regulations be generally effective for new service contracts and material modifications of existing service contracts entered into on or after the first day of the year beginning at least 12 months following publication of final regulations.
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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