2/10/2011
The Department of Labor provided two new final rules on retirement plan disclosures in the second half of 2010. The two regulations have different purposes and disclosures are made to different groups. We will discuss each regulation in detail below. First, regulations under ERISA section 408(b)(2) address fee disclosures to plan fiduciaries by service providers. Second, regulations under ERISA Section 404(a)(1) address fee disclosures to plan participants in participant-directed individual account plans.
408(b)(2)
The first set of regulations, under ERISA Section 408(b)(2) (published July 15th 2010), regulate disclosures from service providers to plan fiduciaries (fiduciaries are those with authority to arrange for services to the plan). No participant-level disclosures are required by the 408(b)(2) regulations. The interim final rule is effective July 16, 2011.
Under ERISA section 406(a)(1)(C), a contract or arrangement between a service provider ("party in interest") and a pension plan would normally be a prohibited transaction. ERISA section 408(b)(2) provides an exception to the prohibited transaction rule for 'reasonable' service provider contracts or arrangements. The regulations provide further clarification of what is required to have a "reasonable" service provider contract or arrangement. The regulations require "that certain service providers to employee pension benefit plans disclose information to assist plan fiduciaries in assessing the reasonableness of contracts or arrangements, including the reasonableness of the service providers' compensation and potential conflicts of interest that may affect the service providers' performance." The regulations do not currently affect welfare plans, IRAs, simplified employee pensions, or simple retirement accounts.
We expect that many of our plan document and administration software users are subject to the new reporting rules (although certainly not all). Rules apply to third party administrators, those providing recordkeeping or brokerage services, actuarial, consulting, legal, accounting, auditing and other similar services who have contracted with a pension plan and reasonably expect $1,000 or more in direct or indirect compensation paid by the plan.
If you currently provide your customers with a fee schedule that details expenses for your services paid by the plan, you may already meet most of the requirements under the new rule. The rule requires all of the following to be disclosed in writing "reasonably in advance of the date the [service provider] contract or arrangement is entered into":
- a description of the services to be provided;
- a statement, if applicable, that the services are provided by the service provider as a fiduciary or as a registered investment provider;
- a description of all direct compensation reasonably expected to be received (paid directly by the plan);
- a description of all indirect compensation reasonably expected to be received (paid by sources other than the plan, the plan sponsor, the service provider/affiliate/subcontractor but ultimately paid by the plan);
- a description of other compensation "paid among the covered service provider, an affiliate, or a subcontractor... if it is set on a transaction basis (e.g., commissions, soft dollars, finder's fees or other similar incentive compensation based on business placed or retained) or is charged directly against the covered plan's investment and reflected in the net value of the investment (e.g., Rule 12b-1 fees); including identification of the services for which such compensation will be paid and identification of the payers and recipients of such compensation"; and
- a description of any compensation expected in connection with termination of the service provider contract/arrangement.
Additional disclosures are required for recordkeeping services, fiduciary services and recordkeeping and brokerage services. If the compensation arrangements change, generally an advance 60 notice of the changes is required.
Because the format and content of these disclosures will vary widely amongst our customers, we do not expect to provide sample disclosures.
404(a)(1)
Looking at our defined contribution plan documents, this notice will apply if checklist item G.3 (Specify the extent to which the Plan permits Participant self direction...) is not "None" (checklist item G.2 in full scope, ERISA-covered 403(b) plans).
The regulations set out several different disclosure requirements:
- Annual 'plan-related' information
- circumstances under which participants may give investment instructions (and limitations on this ability)
- description of plan provisions related to the exercise of voting (and any restrictions)
- identification of designated investment managers
- description of 'brokerage windows', 'self-directed brokerage accounts' or other similar options
- explanation of any fees and expenses for general plan administrative services (legal, accounting, recordkeeping) that may be charged against individual accounts and are not reflected in total operating expenses of any designated investment alternative
- explanation of any fees and expenses that may be charged against an individual account on an individual basis (fees for processing loans, QDROs, investment advice, brokerage windows, sales charges, redemption fees, etc.) and are not reflected in total operating expenses of any designated investment alternative.
- Quarterly statements showing actual dollar amounts of fees and expenses charged to the Participant's account
- Annual statements showing performance data, benchmarks and fees for each designated investment alternative offered under the plan.
We do expect to provide software (similar to our current annual notice for safe harbor plans) for customers to prepare the annual 'plan-related' information. Some data for the notices can be handled through the section J plan expenses information we currently have available. We expect that we will have to add a few more data-entry items to accommodate the notice. We do not intend to provide software for the remaining notice requirements as we assume the investment provider is better situated to provide this information.
If you have thoughts about how you would like our software to work for these notices, please let us know.
If you have any questions please feel free to contact us at support@ftwilliam.com or call 800.596.0714.