New Disclosure Requirements for Benefit Plans
Paul J. Soler, CPA
In an effort to increase fee transparency in benefit plans, the U.S. Department of Labor (DOL) has issued two new regulations that require certain disclosures be provided to plan sponsors and plan participants. These disclosures are intended to provide both plan sponsors and plan participants with information regarding the fees charged in their retirement plans.
We recommend that plan sponsors contact their service providers to ensure that these disclosures are made within the required deadlines. Plan sponsors should retain the written disclosures that are provided to them under Section 408(b)(2) as evidence that they are in compliance with regulation. Similarly, support should be retained in the files to substantiate that participants were provided the appropriate annual and quarterly disclosures.
Section 408(b)(2) – Service Provider Disclosures
The service provider disclosures required under Section 408(b)(2) require covered service providers to disclose, in writing, the direct and indirect compensation received for services performed when compensation is expected to exceed $1,000. While the disclosures of direct and indirect compensation are required to be made in writing, there is no requirement in the final regulations for a written contract between the covered service provider and the plan sponsor. It is critical to note that if these disclosures are not made to plan sponsors, then the fees paid to the covered service providers will be considered a prohibited transaction under DOL regulations, and both the covered service provider and the plan sponsor would be required to pay a 15% excise tax on the amount of the compensation paid.
What types of plans are covered by this regulation?
This regulation applies to all defined contribution and defined benefit plans. It does not apply to simplified employee pension plans (SEPs), SIMPLE retirement accounts, IRAs and certain annuity contracts and custodial accounts described in Internal Revenue Code section 403(b). It also does not apply to employee welfare plans although the DOL has indicated that they will issue separate regulations for these plans.
Who is a covered service provider?
A covered service provider is defined as the following:
- ERISA fiduciary service providers to a covered plan or a plan asset vehicle in which such a plan invests
- Investment advisers registered under federal or state law
- Recordkeepers or brokers who make designated investment alternatives available to the covered plan
Providers of one or more of the following services who also receive indirect compensation in connection with such services:
- Accounting, auditing, actuarial, banking, consulting, custodial, insurance, investment advisory, legal, recordkeeping, securities brokerage, third party administration or valuation services
What is direct compensation?
Direct compensation is compensation received directly from the plan by the covered service provider.
What is indirect compensation?
Indirect compensation is compensation received from any source other than the plan sponsor, the covered service provider, their affiliates or their subcontractors.
What is required to be disclosed by the covered service provider?
Below is a summary of some of the information that is required to be disclosed to plan sponsors by covered service providers:
- A description of all services to be provided and all direct and indirect compensation to be received by the covered service providers, their affiliates or their subcontractors.
- A description of any arrangement between the payer and the covered service provider pursuant to which indirect compensation was paid. The covered service provider must also identify the sources for indirect compensation, plus the services to which such compensation relates.
- Any allocations of compensation made among related parties when such allocations occur as a result of charges made against a plan’s investments or are set on a transaction basis.
- Whether or not they are providing recordkeeping services and the compensation attributable to such services, even when there is no explicit charge for recordkeeping services in the agreement or contract.
- In certain situations, the disclosure of an investment’s annual operating expenses and any ongoing operating expenses in addition to the annual operating expenses.
When are these disclosures required to be provided?
These disclosures are required to be provided prior to the plan sponsor engaging the covered service provider. For existing contracts/arrangements, the disclosure should be provided no later than July 1, 2012. If there are changes to the initial information communicated, these changes should be made as soon as practical, but no later than 60 days from when the covered service provider is informed of the change. Disclosures of changes to investment information are to be made at least annually.
Section 404(a)(5) – Participant Disclosures
Section 404(a)(5) requires plan administrators to provide certain plan- and investment-related disclosures to plan participants. The disclosure requirements under this regulation apply to defined contribution plans where participants are responsible for directing their investment allocations. The disclosures under this regulation are initially required to be made to participants on or before the date that the participant can first direct their investments, and then annually after that. The initial disclosures are required to be made no later than August 30, 2012, and the quarterly disclosures are first required to be made no later than November 14, 2012.
Plan - Related Disclosures
Below is a summary of the plan-related information that is required to be disclosed:
General Plan Information – Information about the structure and mechanics of the plan and a list of current plan investments.
Administrative Expenses Information – An explanation of any general plan expenses that may be deducted from all participant accounts. Examples include legal, accounting and recordkeeping fees.
Individual Expenses Information – An explanation of any fees that may be deducted from an individual participant’s account related to transactions initiated by that participant (i.e., fees for participant loans or distributions).
In addition to the above information that is required to be communicated initially and annually, plan administrators are also required to provide, on at least a quarterly basis, statements detailing the amount of administrative and individual expenses actually charged to their account, along with a description of the services for which the charge was made.
Investment - Related Disclosures
Below is a summary of the investment-related disclosures that are required to be made for each investment option offered by the plan:
Performance Data – Participants must be provided specific information about historical investment performance. Information shall be provided in one-,five- and ten-year returns, as long as the investment does not have a fixed rate of return. For investments options with fixed rates of return, the annual rate of return and the term of the investment shall be disclosed.
Benchmark Information – The name and return of an appropriate broad-based securities market over one-,five- and ten-year returns, as long as the investment does not have a fixed rate of return. There is no benchmark information required for investment options with a fixed rate of return.
Fee and Expense Information – For investment options without a fixed rate of return, the total annual expenses expressed as both a percentage of assets and as a dollar amount for each $1,000 invested. There is no requirement to disclose the total annual expenses for investments with a fixed rate of return.
For both investment options with and without a fixed rate of return, any shareholder-type fees or restrictions on the participant’s ability to purchase or withdraw from the investment shall be disclosed.
Internet Website Address – Investment-related disclosures shall include an Internet website address that provides participants and beneficiaries access to specific additional information about the investment options.
Glossary – Investment-related disclosures shall include a glossary of terms to assist participants and beneficiaries in understanding the plan’s investment options, or an Internet website address that has a glossary.