On
February 3, 2012, the U.S. Department of Labor issued the long-awaited final
service provider fee disclosure regulation under Section 408(b)(2) of the
Employee Retirement Income Security Act of 1974 (ERISA). The regulation
requires certain service providers to make written disclosure of their services
and fee arrangements to a responsible plan fiduciary. A responsible plan
fiduciary is defined as a fiduciary with authority to cause the plan to enter
into, or extend or renew, the contract or arrangement, and typically includes
the plan sponsor, officer, trustee or custodian. The disclosure must be made
reasonably in advance of entering into, extending, or renewing a contract or
service arrangement with that provider. The rule does not require a particular
format for the required disclosures, which may be contained in a single
document or in multiple documents.
Background
ERISA requires plan fiduciaries, when selecting and monitoring service
providers and plan investments, to act prudently and solely in the interest of
the plan's participants and beneficiaries. Responsible plan fiduciaries also
must ensure that arrangements with their service providers are
"reasonable" and that only "reasonable" compensation is
paid for services. According to the Department of Labor, reasonable
compensation does not mean that a plan fiduciary needs to select the cheapest
provider. An unreasonable arrangement could lead to a prohibited transaction.
By requiring covered service providers to disclose their fee arrangements, plan
fiduciaries will have a means to compare service providers on an even playing
field with all of the services and fees they provide being disclosed and all
parties involved identified. The disclosures will also provide plan fiduciaries
with knowledge of any potential conflicts of interest.
When is the new Service Provider Disclosure rule effective?
The rule goes into effect on July 1, 2012. This means that covered service
providers must provide the required disclosures to the plan fiduciary for any
arrangements with a covered plan that will be renewed, extended or entered into
as of July 1, 2012.
What does this mean for Plan Fiduciaries?
Plan fiduciaries must be diligent to secure the proper disclosures from covered
service providers to the plan and should implement a process to ensure:
·
The sufficiency and
accuracy of the information received from the service provider pursuant to the
final regulation;
·
Timely receipt of all
information, including any changes to previously provided information;
·
Timely requests to
service providers for required information, especially with respect to any
indirect compensation;
·
A format and disclosure
language that is understandable to the plan participant population involved;
·
Appropriate notice and
action if the information is not timely provided or is deficient;
·
Appropriate
indemnifications with respect to timely compliance; and
·
Appropriate
documentation of the receipt of the information, the fiduciaries’ consideration
of it, and any actions taken.
Who is a “Covered Service Provider”?
The final regulation defines a covered service provider as “a service provider
that enters into a contract or arrangement with the covered plan and reasonably
expects $1,000 or more in compensation, direct or indirect, to be received in
connection with providing” certain specified services, including fiduciary or
registered investment advisor services, and recordkeeping or brokerage services.
It also applies to other services for which the covered service provider
expects to receive indirect compensation; these other services include
accounting, auditing, actuarial, banking, consulting, custodial, insurance,
investment advisory, legal, recordkeeping, securities brokerage, third party
administration, or valuation services. Indirect compensation is compensation
received from a source other than the plan sponsor or the plan itself.
What is a “Covered Plan” for purposes of the service provider
disclosure rule?
This regulation applies to ERISA-covered defined benefit and defined
contributions pension plans, including 403(b) annuity contracts and custodial
accounts subject to ERISA. It does not apply to simplified employee pension
plans (SEPs), SIMPLE retirement accounts, employee welfare benefit plans, and
IRAs. Also exempt are annuity contracts and custodial accounts in 403(b) plans
that were issued to employees before January 1, 2009, where no additional
contributions have been made, and the contract is fully vested and enforceable
by the employee.
What information needs to be disclosed?
Covered service providers are required to disclose (before the parties enter
into an agreement for services):
·
All services to be
provided under the agreement
·
The compensation or fees
to be received for each service
·
The manner of receipt of
compensation or fees
·
Information about
conflicts of interest
What happens if the Plan Fiduciary (Plan Administrator) does not
receive the required disclosures by July 1, 2012?
The disclosure burden is on the service provider. However, if the information
is not disclosed by July 1, 2012, then the contract or arrangement between the
plan and the service provider will not be deemed reasonable under ERISA, and
the plan will have engaged in a prohibited transaction, not only subject to
excise taxes but required to be disclosed in both a supplemental schedule to
the 2012 Form 5500 filing and the Plan’s 2012 audited financial statements, if
the Plan is subject to audit. If this occurs, the plan fiduciary should first
make a written request to the covered service provider for the missing
information. If that proves unsuccessful, the plan fiduciary should contact the
Department of Labor’s Employee Benefits Security Administration (EBSA).
Conclusion
Due to the complexity of the service provider disclosure rules, and the
additional reporting requirements for prohibited transactions, we suggest that
you contact ERISA counsel to ensure you receive the proper disclosures in a
timely manner.
For more information, please contact Judy Fryer at (800)
477-7458.
© 2012 EisnerAmper LLP
Paul
has more than 25 years of experience of public accounting and senior financial
management experience working with financial institutions. The addition
of Paul will benefit the firm as well as our financial institution clients and
will further strengthen our commitment, expertise, and reputation for
excellence in providing audit, tax and consulting services to financial
institutions. 
