Second Cite
Federal regulators have issued the second of a three-part disclosure rule package: proposed mandates for detailed disclosures from service providers to plan fiduciaries.
The U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) said the disclosures focus on direct and indirect service provider compensation and a provider’s potential conflicts of interest. According to Bradford P. Campbell, Assistant Secretary of Labor for EBSA, regulators opted to tie the new fiduciary disclosure requirement to the 408(b)(2) provision, which deals with prohibited plan transactions with parties in interest and a stipulation that fiduciaries only pay reasonable plan fees. After the proposals were released, he said the new disclosures will be considered when the agency judges whether the fees are reasonable. “We’re helping to define what reasonable means so it’s clear when that duty is being met,’ Campbell said. “In order for them to carry out their duty under the law, fiduciaries need this information to do their job.”
The EBSA proposal mandates:
Disclosure of Services and Compensation. The terms of a plan’s contract with a provider must require that the provider disclose information regarding all services to be performed and all compensation that will be received either directly from the plan or indirectly from parties other than the plan or plan sponsor. The proposal includes a definition of compensation and fees, as well as rules for bundled service providers and for estimating the amount of prospective compensation. Fees can be expressed in dollar terms or through an estimate.
Disclosure of Conflicts of Interest. Service providers must disclose information about relationships or interests that may raise conflicts of interest for the provider in delivering plan services. Specifically, providers must describe any participation or interest of the service provider in transactions to be entered into by the plan pursuant to the contract, any material relationships with other parties that may create conflicts of interest, any compensation the service provider may receive that it can effect without prior approval by an independent fiduciary, and any policies or procedures that address potential conflicts of interest.
Ongoing Disclosure Obligations. There will be ongoing disclosure obligations relating to material change in information already disclosed within 30 days of such change, compensation, or other information related to the contract or arrangements that is requested by the responsible plan fiduciary or plan administrator to comply with the Employee Retirement Income Security Act’s (ERISA) reporting and disclosure requirements.
Who Is Affected
The new disclosures affect fiduciary service providers; providers of banking, consulting, custodial, insurance, investment advisory or management services; recordkeeping, securities brokerage, or third-party administration services; or providers that receive indirect compensation for accounting, actuarial, appraisal, auditing, legal, or valuation services. “That’s where we have seen the type of conduct you have to be concerned about,” Campbell said of the final group.
In an instance where the plan is not aware that a provider is not complying with the law, the department is proposing a class exemption to give the fiduciary protection.
The proposal follows EBSA’s release of the latest Form 5500 focusing on plan disclosures (See “Coming Soon,” at right); a third regulatory piece governing plan disclosures to participants will follow, Campbell said, probably in the next several months. Campbell said the DoL decided to break its disclosure mandates into three pieces in recognition that different retirement plan actors have varying information needs. “We’re trying to target these disclosures where they are needed and not unduly burden the fiduciary and the provider when they are not,’ he declared.
Campbell indicated that regulators will take a few months after the close of the public comment period in mid-February to craft the final rule and then the federal Office of Management and Budget will likely take a few additional months to process the new regulation before it is released in final form.
Labor Department Proposes Civil Penalties for Disclosure Violations
The U.S. Department of Labor (DoL) has proposed a regulation for assessing civil penalties against plan administrators who fail to disclose certain documents to participants, beneficiaries, and others as required by the Pension Protection Act (PPA). The proposed regulation, published in December, sets forth the administrative procedures for assessing and contesting penalties but does not address substantive provisions of the new disclosure requirements.
The PPA established new disclosure provisions relating to funding-based limits on benefit accruals and certain forms of benefit distributions; plan actuarial and financial reports; withdrawal liability of contributing employers; and participants’ rights and obligations under automatic contribution arrangements. The PPA gives the DoL authority to assess civil monetary penalties of up to $1,000 per day against plan administrators for violations of the new disclosure requirements. —Rebecca Moore
Coming Soon
2009 Form 5500 changes increase fee disclosure
In November, revisions to the Form 5500 annual return/report for plan year 2009 were published. The most substantial changes are to the Schedule C section of the 5500. These new changes are applicable generally to plans with 100 or more participants and center around the Department of Labor’s (DoL) goal of bringing plan fiduciaries greater fee transparency. On the new Schedule C, fees paid directly or indirectly to service providers receiving $5,000 or more in total compensation for plan services must be reported.
Generally, regarding any direct or indirect compensation, plans must report: the identity of all persons who received payments of more than $5,000, as well as that person’s relationship to any party-in-interest to the plan; a description of the service received for such payment; the total of direct compensation paid to the person; whether the person received any indirect compensation; and the total non-eligible indirect compensation.
The DoL draws a distinction between reporting on direct compensation and indirect compensation. Direct compensation (payment received directly from the plan or plan sponsor) is fairly simple to report. However, indirect compensation (that received from sources other than directly from the plan or plan sponsor, such as management fees, sub-transfer agency fees, shareholder servicing fees, 12b–1 distribution fees, and brokerage commissions) may be more complicated to report.
Eligible indirect compensation, on the other hand, includes fees or expense reimbursement payments charged to investment funds and reflected in the value of the investment or return on investment of the participating plan (or its participants), or other transaction-based fees for transactions or services involving the plan that were not paid directly by the plan or plan sponsor (whether or not they are capitalized as investment costs). The sponsor must disclose that there was indirect compensation; the services provided or purposes of payment; the amount of the fee, an estimate of the fee, or the formula used to calculate the fee; and the identity of the parties paying and receiving the fee.
Another unique aspect of the new 5500 requirements is that the DoL requests that plan sponsors report providers who fail to disclose required information. —PA