Retirement Plan Fee Disclosure Continuum
The DOL’s Employee Benefit Security Administration has been working on a multi-faceted approach to ensure adequate fee disclosures payable by retirement plans. The first prong came in the form of Schedule C reporting requirement; these requirements took effect for the 2009 plan year. The second prong relates to fee disclosure to plan sponsors. On July 16, 2010, the DOL issued interim final regulations addressing fee disclosure matters by service providers. Later this year, the DOL is expected to issue regulations relating to disclosure to participants.
The recently issued regulations will take effect for relationships in existence on July 16, 2011. Importantly, this applies to relationships in existence, and not to contracts entered into on or after that date.
Generally, ERISA prohibits party-in-interest transactions. Without some exemption from this prohibited transaction, retirement plan business would be stalemated. Historically, a prohibited transaction exemption (PTE) would apply, as long as the fee for service was reasonable and the plan sponsor had the ability to terminate, on short notice and without penalty, any relationship with a service provider. These regulations attempt to strengthen the PTE by requiring a service provider, in addition to the above-described, to provide written disclosure (a formal written agreement is not required) describing any direct or indirect fee that it will receive from the plan.
These rules apply to retirement plans, both defined contribution and defined benefit plans, subject to ERISA. The rules do not apply to SEPs, SIMPLEs, IRAs, non-ERISA 403(b) plans (plans sponsored by state or local governments), and plans sponsored by churches not electing to be covered by ERISA. Also, notably, the regulations do not apply to welfare benefit plans, though, a placeholder is included in the regulations that will allow the DOL to add regulations relating to welfare benefit plans at a later time.
Service providers covered by these regulations are:
- Fiduciary service providers, including registered investment advisors;
- Record keepers and brokers providing services to participant-directed account plans; and,
- Service providers receiving indirect compensation for services, such as consulting, accounting, auditing, actuarial, banking or TPA services.
The written disclosure from the service provider must include:
- A description of the fiduciary services to be provided;
- An explanation of the service provider’s status as a fiduciary, or registered investment adviser; and
- A description of the direct, or indirect, compensation to be received.
Compensation can be described in the form of a dollar amount, a percent, a per capita, or other similar descriptive.
Any changes to the written disclosure must be provided to the plan sponsor as soon as possible, but no later than 60 days following knowledge of the change.
Failure to comply with the written disclosure can result in a prohibited transaction, but the regulations also provide some good faith exceptions, as long as any inadvertent failure to disclose is corrected within 30 days.
There is no requirement to make the disclosure if the expected direct or indirect compensation will be less than $1,000.
Between now and July, 2011, plan sponsors and service providers should work together to make certain that the requisite written disclosures can be accomplished.
The information contained in this Benefit Beat is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations.
As required by U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this Benefit Beat is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.