On February 3, 2012, eighteen months after announcing an interim final rule, the Department of Labor (“DOL”) published a final rule (“Final Rule”) adopting disclosure requirements for retirement plan service providers under Section 408(b)(2) of the Employee Retirement Income Security Act of 1974 (“ERISA”). The Final Rule requires “covered service providers” to disclose certain information to plan fiduciaries in order for a contract or arrangement with the provider to the plan to be “reasonable” within the meaning of ERISA section 408(b)(2) and, therefore, satisfy that statutory exemption from ERISA’s prohibited transaction rules. Responsible plan fiduciaries of “covered plans” must ensure all “covered service provider” contracts and arrangements comply with the disclosure requirements of the Final Rule by the July 1, 2012, effective date.
The Final Rule supersedes and, in a few respects, differs from the interim final rule (discussed in detail in our July 2010 issue). In addition to delaying the compliance effective date until July 1, 2012, the DOL introduced the following key substantive additions and changes:
- Code section 403(b) annuity contracts or custodial accounts issued before January 1, 2009, to which the employer has ceased making contributions (and no longer has an obligation to make contributions) in which the employee is fully vested, and can enforce the rights and benefits of the contract or account against the insurer or custodian without employer involvement are not subject to the disclosure requirements of the Final Rule.
- A service provider receiving indirect compensation must describe the service provider’s relationship with the payee along with a disclosure of the amount of indirect compensation received.
- Investment-related information in the Final Rule for participant-directed individual account plans that are subject to the participant-level disclosures regulation is conformed to the requirements of the participant-level disclosures regulation. For example, for an investment that is a designated investment alternative, the covered service provider must provide any information that is within its control or reasonably available to it that is required for the covered plan administrator to comply with its own disclosure obligations under the participant-level disclosures regulation.
- Investment related service providers, including those providing recordkeeping and brokerage services, may now satisfy the requirements of investment-related disclosures by providing current disclosure materials of the investment issuer (such as a mutual fund prospectus), as long as the issuer is not affiliated with the covered service provider, and is:
- a registered investment company;
- an insurance company qualified to do business in a state;
- an issuer of a publicly-traded security; or
- a financial institution supervised by a state or federal agency.
The covered service provider must provide the responsible plan fiduciary with a statement that the covered service provider is making no representations as to the completeness or accuracy of such materials, but must act in good faith and must not know that the materials are incomplete or inaccurate.
- Changes related to investment information must be disclosed on at least an annual basis.
Plan sponsors should begin working now to determine whether the plans they sponsor are “covered plans” within the meaning of the Final Rule and, if so, whether the plan’s contracts and arrangements with “covered service providers” satisfy the disclosure requirements of the Final Rule. It is the responsibility of the plan fiduciary to ensure compliance with the Final Rule as a part of its fiduciary obligations when selecting and monitoring service providers. Where the plan fiduciary determines that a service provider contract or arrangement does not satisfy the requirements of the Final Rule, the plan fiduciary must request in writing that the service provider provide the required information. If the service provider fails or refuses to provide such information upon request, the plan fiduciary must promptly consider termination of the contract or arrangement for failure to provide information necessary for the relationship to be deemed “reasonable” within the meaning of ERISA section 408(b)(2). To obtain an exemption from the prohibited transaction rules, in light of the service provider’s failure to provide the required information, the plan fiduciary must first notify the DOL of the failure within 30 days following the earlier of the service provider’s refusal to furnish the requested information or the date that is 90 days after the date the plan fiduciary requests the information.
Provided below is a checklist to help plan sponsors determine whether they are the sponsor of a “covered plan” within the meaning of the final rule and, if so, who is a “covered service provider” to the plan, and what the “covered service provider” under a current contract or arrangement must disclose by July 1, 2012, in order for the contract or arrangement to satisfy the statutory exemption from the prohibited transaction rules for a “reasonable” service arrangement under ERISA section 408(b)(2).
| I. Is the Plan a Covered Plan? |
Yes
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No
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| 1. Is the plan an ERISA-covered pension plan (e.g.,401(k), profit sharing, money purchase, single employer or multiemployer defined benefit plan or ERISA-covered 403(b) Plan)? |
If you answered NO, the Plan is not a covered plan subject to the Final Rule under section 408(b)(2), and you need read no further. If YES, continue.
| 2. Is the plan a simplified employee pension (SEP) plan under section 408(k), a SIMPLE retirement account under Code section 408(p), an individual retirement account under Code section 408(a) or an individual retirement annuity under Code section 408(b)? |
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| 3. Does the Plan consist of Code section 403(b) annuity contracts or custodial accounts issued before January 1, 2009, where the employer has ceased making contributions and no longer has any obligation to make contributions, in which the employee is fully vested and can enforce the rights and benefits of the contract or account against the insurer or custodian without employer involvement? |
If you answered YES to either question two or three, the Plan is not a covered plan subject to the Final Rule under section 408(b)(2), and you need read no further.
If you answered NO to both questions two and three, the plan is a covered plan, and the plan fiduciary must obtain required disclosures from all covered service providers.
| II. Is the Service Provider a Covered Service Provider? |
Yes
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No
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| 1. Is the service provider a fiduciary within the definition of ERISA section 3(21)? | |||||||||||||||||
| 2. Is the service provider a fiduciary to an investment contract, product or entity that holds plan assets and in which the covered plan has a direct equity investment? | |||||||||||||||||
| 3. Is the service provider a registered investment adviser under the Investment Advisers Act of 1940 or any state law? |
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| 4. Is the service provider a recordkeeper or broker to an individual account plan that permits participants to direct investment of their accounts, and that offers a platform in connection with such recordkeeping or brokerage services under which one or more designated investment alternatives will be available 1? | |||||||||||||||||
5. Is the service provider providing any of the following services for which it or an affiliate or subsidiary will receive, or reasonably expects to receive indirect compensation (compensation from sources other than the plan, plan sponsor, affiliate, or subcontractor) or payments from related parties, including but not limited to commissions, soft dollars, finder’s fees or rule 12b-1 fees?
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If you answered NO to all questions one through five, the service provider is not a covered service provider under the Final Rule, and the remainder of the questionnaire does not apply to that provider. If you answered YES to any question one through five, continue.
If you answered YES to either item six or seven, the service provider is not a covered service provider under the Final Rule, and the remainder of the questionnaire does not apply to that provider. If you answered NO to both items six and seven, continue.
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6. Is the person or entity described in questions one through five of this Part II above an affiliate or subsidiary of a service provider with whom the Plan has no direct contract or arrangement?
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| 7. Is the person or entity described in questions one through five of this Part II above providing services to an investment contract, product, or entity in which the plan is invested, but not providing such services in the capacity of a fiduciary as described in question two of this Part II, above? |
If you answered YES to this question eight, the service provider is a covered service provider, and must provide timely and adequate disclosures, as discussed below, to comply with the Final Regulation.
If you answered NO to this question eight, the service provider is not a covered service provider under the final rule, and no disclosure is necessary.
| 8. Will the service provider as described in any item one through five above receive, or does the service provider or its affiliates or subsidiaries reasonably expect to receive, $1,000 or more in direct or indirect compensation in connection with the contract or arrangement with the plan (excluding any non-monetary compensation valued at $250 or less)? 4 |
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| III. Required Disclosures |
Yes
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No
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N/A
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| 1. Does the contract or arrangement contain a written description of theservices to be provided that is sufficient to allow the plan fiduciary to assess whether compensation received for those services is reasonable? | |||
| 2. If the service provider, affiliate, or subcontractor will provide or reasonably expects to provide services as a fiduciary within the definition of ERISA section 3(21) or as a registered investment adviser under the Investment Advisers Act of 1940 or state law, has the service provider provided a written statement to that effect? | |||
| 3. Has the service provider provided a written description of all direct compensation (compensation provided directly from the plan) that the service provider, or its affiliates or subcontractors will receive or reasonably expect to receive in connection with the contract or arrangement? 5 | |||
| 4. Has the service provider provided a written description of all indirect compensation (compensation from sources other than the plan, plan sponsor, affiliate, or subcontractor) that the service provider, or its affiliates or subcontractors will receive or reasonably expect to receive in connection with the contract or arrangement? 5
Does this description name the payer and describe the arrangement between the payer and the recipient under which the indirect compensation is paid? |
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| 5. Has the service provider provided a written description of all compensation reasonably expected to be paid among the service provider, and its affiliates, and subcontractors that is set on a transaction basis or charged directly against a plan investment and reflected in the net value of the investment?
If so, does the description identify the payer and recipient (including status as an affiliate or subcontractor) and the services for which such compensation will be received? |
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| 6. Has the service provider provided a written disclosure of any compensation the service provider, or its affiliates or subcontractors reasonably expect to receive for the termination of the contract or arrangement, and for the calculation of and return of any prepaid compensation upon such early termination? | |||
| 7. Do all compensation-related disclosures adequately describe the manner in which the service provider, or its affiliates or subcontractors will receive compensation under the contract or arrangement? | |||
| 8. If the service provider, or its affiliate, or subcontractor is providing recordkeeping services for the plan, has the service provider disclosed a segregated description of the direct and/or indirect compensation the service provider, affiliate, or subcontractor will receive or expects to receive for those recordkeeping services? | |||
| 9. If the service provider is providing services to a plan investment contract, product or entity holding plan assets and in which the plan has a direct equity investment, or is a recordkeeper or broker that makes available designated investment alternatives on a platform for participant-directed individual account plans, has the service provider provided a disclosure of the following:
(a) Any compensation that will be charged directly against the covered plan’s investment (such as in connection with the acquisition, sale, transfer of, or withdrawal from the investment contract, product, or entity) and that that is not included in the annual operating expenses of the investment (b) The annual operating expenses (c) Any ongoing expenses in addition to annual operating expenses (d) Information that is within the control of, or reasonably available the service provider and that is required for the plan administrator to comply with the participant-level disclosure obligations |
If the answer to each of the questions in Section III is either YES or N/A, the plan fiduciary has received sufficient information under the Final Rule with regard to the covered service provider.
If the answer to any of the questions in Section III is NO, the information provided by the covered service provider is not sufficient, and the plan fiduciary must issue a written request for the covered service provider to supply the missing information. If the covered service provider fails or refuses to provide such information within 90 days of a request, the plan fiduciary must promptly consider termination of the contract or arrangement for failure to provide information necessary for the relationship to be “reasonable” within the meaning of ERISA section 408(b)(2). In addition, the plan fiduciary must report the covered service provider to the DOL for failing to provide the requested information before the plan fiduciary can obtain an exemption from applicable prohibited transaction rules. Given that the compliance deadline is July 1, 2012, plan fiduciaries should move quickly to review covered service provider contracts and arrangements in order to provide non-compliant covered service providers with notice and a request for information at least 90 days before July 1.
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1 A “designated investment alternative” is any investment alternative designated by a fiduciary into which participants may direct the investment of their individual accounts, and does not include brokerage windows, self-directed brokerage accounts or similar arrangements that allow participants to select investments beyond those specifically designated.
2 Consulting services include development or implementation of investment policies or objectives, or the selection and monitoring of service providers or plan investments.
3 Investment advisory services may be for the plan or for the plan’s participants.
4 An “affiliate” includes any party that directly or indirectly controls, is controlled by, or is under common control with a covered service provider. A subcontractor is a party that is not an affiliate of the covered service provider and that, pursuant to a contract or arrangement with the covered service provider or an affiliate of the covered service provider, reasonably expects to receive $1,000 or more in compensation for performing one or more covered services.
5 Compensation may be disclosed as a monetary amount, formula, percentage of the covered plan’s assets or a per capita charge for each participant or beneficiary. If compensation cannot reasonably be described by any of these methods, it may be described by any reasonable good faith estimate, provided that the service provider explains the methodology and assumptions used to prepare the estimate.
