Earlier this year the US Department of Labor adopted final regulations under ERISA Section 408(b)2. The final rule (Rule) was adopted with a final compliance date of July 1, 2012. This date is rapidly approaching.
Why do you care – because covered service providers must provide disclosure to plan sponsors of all the information concerning fees paid and charged to the plan. These disclosures must include not only the direct service fees, but also the not so direct compensation that may also be included in the compensation for the service provider.
Here is what is required.
Section 408(b)2 allows someone to provide services to an ERISA plan if the following three (3) conditions are met:
1. The Contract or arrangement is reasonable.
2. The Services are necessary for the establishment or operation of the plan.
3. No more than reasonable compensation is paid for the services.
The new regulation requires a Covered Service Provider (CSP) to make specific disclosures to the Covered Plan regarding what services the plan is receiving and what those services cost. Without these disclosures, that service contract is deemed unreasonable and a prohibited transaction.
A covered plan includes all employee benefit plans under ERISA 3(2)A. Specifically not covered or excluded plans are: Simplified Employee Pensions (SEP), SIMPLE retirement accounts, IRAs, welfare benefit plans, 403(b) plans, government plans, plans that have no employee participants such as KEOGH plans, certain annuity contracts issued before January 2009 which are fully vested and employers are no longer making contributions to the plan. These plans are not affected by the disclosure requirements.
Covered service provider as defined in the rule:
1. Provide services to the plan either as an ERISA fiduciary directly to the covered plan or indirectly by providing service to an investment contract, product or vehicle holding plan assets where the covered plan is a direct equity investment. This could be providing services as an RIA directly to the plan.
2. Reasonably expect $1,000 or more in compensation from providing services to a covered plan. This includes direct and indirect compensation.
3. Contract or arrangement with the covered plan (if you don’t have a direct arrangement you are not a covered service provider). This means some service provider may need to provide disclosures for themselves and their affiliates or subcontractors who don’t have their own arrangement with the plan but provide services under the first party’s arrangement with the plan.
Information to be disclosed and when
All services provided under the contract or arrangement must be disclosed and described. The disclosure must indicate which services are provided as an ERISA fiduciary. In addition, CSPs must disclosure their direct and indirect compensation and the payer of the indirect compensation. Indirect compensation may include soft dollars (bundled or unbundled), gifts & entertainment exceeding a $10 threshold, 12b1 fees, floats and any other type of compensation.
The deadline is approaching. It is important to know whether you have a requirement under this new requirement or not