Employee Benefits Update

Fee Disclosure Regulations for Retirement Plans

Plan sponsors and plan administrators need to be aware of the restrictions imposed on the payment of service providers from the assets of defined benefit and defined contribution retirement plans. These plans rely on a wide variety of service providers, such as trustees, recordkeepers, investment advisors and auditors, to operate the plans efficiently. However, in general ERISA requires that no more than reasonable compensation may be paid, directly or indirectly, for these services.

The Department of Labor Employee Benefits Security Administration (“EBSA”) recently released interim final Regulations (the “Regulations”) requiring service providers to make certain disclosures regarding the fees and compensation they will receive in return for providing services to retirement plans. These disclosures must be provided to comply with the requirements of ERISA and are intended to assist plan sponsors and fiduciaries in determining whether the compensation paid for these services is “reasonable.” This update provides a summary of the Regulations.

Service Provider Disclosures. Under the Regulations, a contract or arrangement between a “Covered Plan” (generally a defined benefit plan or defined contribution plan subject to ERISA, excluding IRAs, SEPs and Simple Plans) and a “Covered Service Provider” will not be considered reasonable unless the Covered Service Provider makes the disclosures required under the Regulations. A Covered Service Provider is an entity that expects to earn $1,000 or more in compensation from providing services to a Covered Plan, including trustee, recordkeeping, brokerage, auditing, actuarial, consulting and most other services.

The $1,000 threshold can be met either through “direct” or “indirect” compensation. “Direct compensation” is compensation paid by the Covered Plan. “Indirect compensation” is compensation received by any source other than the Covered Plan, the plan sponsor, Covered Service Provider or an affiliate or subcontractor (e.g., trading or mutual fund fees charged to plan participants).

Required Disclosures. A Covered Service Provider must give a written initial disclosure to the “Responsible Plan Fiduciary” (i.e., the plan fiduciary with the authority to cause the Covered Plan to enter into, renew or extend the service contract) and this disclosure must contain certain information, including:

• A description of the services to be provided;
  
• A description of all direct compensation, indirect compensation (including who will pay indirect compensation), compensation received from a related party (e.g., an affiliate or a subcontractor) and compensation received as a result of the termination of the contract or arrangement;
  
• A description of all direct or indirect compensation to be received for the provision of recordkeeping services, including a good faith estimate of such compensation if the Covered Plan will not be billed separately for recordkeeping services; and
  
• Information regarding investment contracts or products that hold plan assets, including a description of compensation charged directly against the invested amount in connection with a sale or other transaction, a description of annual operating expenses and a description of any other ongoing expenses.

If the Responsible Fiduciary or plan administrator requires any other information to comply with the requirements of ERISA, it may make such a request with the Covered Service Provider, and the Covered Service Provider must provide the information within 30 days. No contract will fail to be considered reasonable simply because a Covered Service Provider, acting in good faith and with reasonable diligence, makes an error or omission in reporting the required information.

Failures to Comply. If a Covered Service Provider fails to fulfill its disclosure obligations, both the Covered Service Provider and the Responsible Plan Fiduciary have violated ERISA. However, the Regulations provide relief, under certain circumstances, for Responsible Plan Fiduciaries through an exemption (known as a “Class Exemption”) from the violation that would otherwise occur under section 408(b)(2) of ERISA. In order to be eligible for this Class Exemption, the following conditions must be met:

• The Responsible Plan Fiduciary did not know that the Covered Service Provider had failed or would fail to make the required disclosures and reasonably believed that the Covered Service Provider had disclosed the required information;
  
• Upon discovering that such disclosure is insufficient, the Responsible Plan Fiduciary requests such additional information as necessary from the Covered Service Provider;
  
• If the Covered Service Provider fails to comply with this request within 90 days, the Responsible Plan Fiduciary notifies the Department of Labor (more information on the requirements of this notice is found in the Regulations); and
  
• The Responsible Plan Fiduciary must make a determination as to whether to terminate the contract in light of the failure, taking into account factors such as the nature of the failure and the availability of alternative service providers.

Welfare plans. The Regulations only apply to retirement plans under ERISA at this time.

As noted, this update provides only a brief overview of the Regulations. We would be happy to provide further detail on these Regulations and their impact on your retirement plans.

IRS Circular 230 Disclaimer: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.