The regulation will go into effect July 1, 2012. The regulation applies to existing arrangements as well as new arrangements entered into on or after July 1. For existing arrangements, the information is supposed to be provided on or before that date.
Plan fiduciaries must ensure information is received. The regulation also requires the plan fiduciary that hires the service provider to review the compensation information that it receives in enough detail to “form a reasonable belief that the required disclosures have been made,” and, if it receives no information or concludes that the information it receives is inadequate, to take steps to obtain the missing information. If the plan fiduciary fails to do so, it might be viewed as having caused the plan to enter into a prohibited transaction, exposing the plan fiduciary to potential liability under ERISA. If the service provider refuses or fails to provide the required information, even after it is asked to do so, the plan fiduciary might have to report the situation to the DOL and even terminate the arrangement with the service provider in order to avoid a prohibited transaction.
Some of the information will be needed to comply with new participant-level disclosure requirements. In any event, plan fiduciaries are likely to need some of the new information to comply with yet another DOL regulation that will require plan administrators of self-directed plans to provide extensive information on designated investment alternatives — including information on fees charged in connection with each of the options — to plan participants.2 The initial disclosures required under that regulation must be furnished to plan participants by August 30, 2012. That regulation is the subject of an upcoming client alert.
Schedule C information is not the same. The information that service providers must disclose, and that plan fiduciaries must review, under the new regulation overlaps to some extent the information that plan administrators already must obtain to fill out Schedule C to the plan’s Form 5500. However, there are a number of material differences, making it impossible for plan fiduciaries to rely solely on disclosures previously received from service providers with respect to Schedule C.
Obligation covers fiduciaries and investment advisers. The regulation covers several broad categories of service providers (called covered service providers or “CSPs”). One category is persons that act as fiduciaries or registered investment advisors directly to retirement plans, or as fiduciaries to investment funds that are subject to ERISA. Investment funds — such as private equity funds and bank-sponsored collective investment funds — can be subject to ERISA if they are not publicly held, have 25% or more ERISA plan investors, and do not qualify under the special rules for “venture capital operating companies” and “real estate operating companies.” Fiduciaries are persons with discretionary control over such funds, such as general partners and trustees.
Also covers certain service providers to self-directed plans and certain service providers receiving indirect or bundled compensation. The regulation also covers recordkeepers and brokers that make designated investment alternatives available to defined contribution plans with self-directed investments. It also covers persons that provide any of a long list of services specified in the regulation, including accounting, auditing, actuarial, appraisal, custodial, investment advisory, legal and investment brokerage services, and either (1) receive their compensation indirectly or (2) receive it on a transaction basis (such as commissions) or charge it against a plan investment as part of a bundle of compensation that they share with others. “Indirect” compensation means compensation received from a source other than the plan itself, the plan sponsor, the CSP or an affiliate of the CSP. For example, it can include compensation received from a fund in which the plan invests. This will be a particularly challenging category for plan fiduciaries to monitor, because by their nature these types of compensation are somewhat hidden.
Basic information required. The initial disclosure must include (1) a description of the services to be provided and, if applicable, a statement that they will be provided as a fiduciary or registered investment advisor, (2) a description of any compensation that the CSP will receive directly from the plan or indirectly from another source, (3) similar information for compensation to be paid in a bundle and shared among the CSP, an affiliate, or a subcontractor, (4) a description of any compensation that will be charged for terminating the contract or arrangement, and (5) a separate description of any direct or indirect compensation that the CSP will receive for recordkeeping services. Recordkeeping services are defined broadly to include services related to plan administration, monitoring plan transactions and maintaining plan accounts, records, and statements. If there’s no explicit charge for recordkeeping, a reasonable and good faith estimate of the cost of the services must be provided. The recordkeeping services that must be disclosed are not limited to the recordkeeping services that cause a service provider to be a CSP.
Additional information required for ERISA funds and designated investment alternatives. Additional investment-related information also must be provided by a CSP that provides fiduciary services to an investment fund subject to ERISA, or that makes designated investment alternatives available to defined contribution plans in connection with recordkeeping or brokerage services. The additional information includes (1) a description of any compensation that will be charged directly against the plan’s investment (e.g., commissions) that is not included in the fund’s or designated investment alternative’s annual operating expenses, (2) a description of the annual operating expenses of the fund or designated investment alternative if the return is not fixed and any ongoing expenses in addition to annual operating expenses (e.g., wrap fees), and (3) any other information about the investment option that is required for the plan administrator to comply with the upcoming participant-level disclosure requirements for designated investment alternatives mentioned above. This would include things like average annual total returns for the previous 1-, 5-, and 10-calendar year periods and comparable information for appropriate benchmark investments. A CSP that provides recordkeeping or brokerage services generally may use materials from the issuer of an investment option to satisfy its obligation if the issuer is not an affiliate and is a mutual fund or other regulated entity.
Uncertainty over brokerage windows. A brokerage window is not itself a designated investment alternative, and the additional information described above is not required for all investments available through a brokerage window. However, the DOL has suggested in some recent FAQs that plan administrators might have to treat an investment available through a brokerage window as a designated investment alternative if 1% of plan participants invest in it.
Information must be updated periodically. Changes in this information (other than investment-related information) generally must be disclosed within 60 days; investment-related information must be updated at least annually.
What plan fiduciaries must do. The obligation to provide the fee disclosure information by July 1, 2012, rests with the CSPs. Before July 1, a plan fiduciary that’s responsible for an arrangement with one or more CSPs need only collect the fee disclosure information it receives from the CSPs. Once the deadline for receiving the information arrives, however, the plan fiduciary must commence the task of reviewing the information to be reasonably sure the required disclosures have been made. This review includes assessing whether the plan fiduciary has received adequate disclosure from each entity it believes is a CSP. A review of each plan vendor and investment relationship to determine whether an entity the plan fiduciary believes is a CSP has failed to provide the required disclosure, and requesting the information from the potential CSP, thus would be warranted. We are available to assist with the follow-up process and the process of identifying all plan CSPs.
177 Fed. Reg. 5632 (Feb. 3, 2012)
275 Fed. Reg. 64910 (Oct. 20, 2010)