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CCH® PENSION — 07/26/10

Fee Disclosure Regs Issued By EBSA Apply Only To Retirement Plans; Effective In 2011

from Spencer’s Benefits Reports: The Department of Labor’s Employee Benefits Security Administration (EBSA) has issued an interim final regulation on disclosure of the compensation service providers receive from defined contribution and defined benefit pension plans. The rule, which appeared in the July 16, 2010, Federal Register, is included in ERISA Reg. Sec. 2550.408b-2(c) and is effective one year from the date of publication, on July 16, 2011.

The interim final regulation applies only to defined contribution and defined benefit pension plans and focuses on the disclosure of the direct and indirect compensation certain service providers receive. A separate section covering welfare plan disclosures has been reserved for a future release because the EBSA recognizes that “there are significant differences between service and compensation arrangements of welfare plans and those involving pension plans.”

The interim final regulation applies to plan service providers that expect to receive at least $1,000 in compensation in connection with their services and that provide any of the following:

• certain fiduciary or registered investment advisory services;
• recordkeeping or brokerage services to a participant-directed individual account plan in connection with the investment options made available under the plan; or
• certain other services for which indirect compensation is received.

Disclosure Requirements

Information required to be disclosed by plan service providers must be furnished in writing to the plan fiduciary. The rule does not require a formal written contract delineating the disclosure obligations.

Information that must be disclosed includes a description of the services to be provided and all direct and indirect compensation to be received by the service provider, its affiliates or subcontractors. Direct compensation is compensation received directly from the plan. Indirect compensation generally is compensation received from any source other than the plan sponsor, the covered service provider, an affiliate, or subcontractor.

Because certain services and costs are so significant or present the potential for conflicts of interest, information concerning those services and costs must be disclosed without regard to whether services are furnished as part of a bundle or package. For example, service providers must disclose whether they are providing recordkeeping services and the compensation attributable to such services, even when no explicit charge for recordkeeping is identified as part of the service contract.

Service providers must disclose whether they are providing any services as a fiduciary to the plan.

Information also must be disclosed about plan investments and investment options. These disclosure obligations are placed on (1) the fiduciaries to investment vehicles that hold plan assets and (2) the recordkeepers and brokers who, through a platform or other mechanism, facilitate the investment in various options by participants in individual account plans, such as 401(k) plans.

Changes to the initial information must be disclosed as soon as practicable, but no later than 60 days from the date on which the covered service provider is informed of such change. Service providers also must, upon request, disclose compensation or other information related to their service arrangements that is requested by the responsible plan fiduciary or plan administrator in order to comply with ERISA’s reporting and disclosure requirements.

Changes From The Proposed Reg

The preamble to the interim final regulation points out seven areas in which the interim final regulation differs from the proposed regulation:

(1) A formal written contract delineating the disclosure obligations is not required. However, disclosures must be in writing; the interim final regulation focuses on the substance of the written disclosure.
(2) The interim final regulation only applies to retirement plans; welfare plans will be the subject of future regulations.
(3) The categories of service providers that must comply with the disclosure requirements have been modified to include “providers of other specified services who receive either ‘indirect compensation’ (generally from sources other than the plan or plan sponsors) or certain types of payments from affiliates and subcontractors.”
(4) A “full disclosure of the circumstances under which the covered service provider will be receiving compensation from parties other than the plan (or plan sponsors), the identification of such parties, and the compensation that is expected to be received” is now required instead of “specific narrative conflict of interest disclosure provisions.”
(5) Certain providers of multiple services must disclose separately the cost to the covered plan of recordkeeping services.
(6) The interim final regulation incorporates the prohibited transaction exemption rules of IRC Sec. 4975(d)(2), so that failure to comply with these rules will make the service provider a “disqualified person” subject to excise taxes.
(7) “The exemptive relief for plan sponsors or other responsible plan fiduciaries…is now incorporated into the final rule for ease of reference and consideration by interested parties.”

Effective Date

The interim final regulation is effective for contracts or arrangements between plans and service providers as of July 16, 2011. The preamble notes that the effective date is one year from the date of publication “to accommodate concerns raised by commentators as to the cost and burden associated with transitioning current and future service contracts or arrangements to satisfy the requirements of the interim final rule.”

Comments on the interim final regulation are due by August 30. Comments can be submitted electronically by email to e-ORI@dol.gov or by using the Federal eRulemaking portal at http://www.regulations.gov (keyword: 408(b)(2) Interim Final Rule). Comments also can be sent to: Office of Regulations and Interpretations, Employee Benefits Security Administration, Room N-5655, U.S. Department of Labor, 200 Constitution Ave., N.W., Washington, DC 20210, Attention: 408(b)(2) Interim Final Rule.

When commenting, EBSA specifically requests input on the feasibility and cost effectiveness of requiring plan service providers furnish to plan fiduciaries a summary disclosure statement as part of the regulation.

For more information on the interim final regulation, contact Allison Wielobob or Fil Williams, at the EBSA’s Office of Regulations and Interpretations, at (202) 693-8500.

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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