By Jon Vogler, Senior Analyst for Retirement Research
In February 2012, the US Department of Labor (DOL) released the long-awaited final disclosure requirements under ERISA Section 408(b)(2). A summary of those requirements appears below.
The Employee Retirement Income Security Act (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.
The final regulations under ERISA Section 408(b)(2) establish specific fee and service disclosure obligations for plan service providers to ensure that plan sponsors and other responsible plan fiduciaries are provided the information they need to make better decisions when selecting and monitoring service providers for the plan.
The final regulations require covered service providers (CSPs) to provide plan sponsors and other responsible plan fiduciaries with information they need to:
- Assess the reasonableness of total compensation, both direct and indirect, received by the CSP, its affiliates, and/or subcontractors;
- Identify potential conflicts of interest; and
- Satisfy reporting and disclosure requirements under Title I of ERISA.
The final regulations apply to any pension plans that are subject to ERISA. This includes defined benefit plans and defined contribution plans such as 401(k) and certain 403(b) plans. The regulations do not apply to individual retirement accounts or individual retirement annuities (IRAs), SEP IRAs, SIMPLE IRAs or welfare plans.
A CSP is a service provider that reasonably expects to receive $1,000 or more in compensation for its services to a plan.
Services are considered "covered" when they are provided:
- Directly to the plan as an ERISA fiduciary
- As an ERISA fiduciary to an investment contract, product or entity that holds plan assets and in which a plan has a direct equity investment
- Directly to the plan as a registered investment advisor under either federal or state law
- By recordkeepers or brokers who make designated investment alternatives available to the covered plan
- For indirect compensation in connection with the following services: accounting, auditing, actuarial, banking, consulting, custodial, insurance, investment advisory, legal, recordkeeping, securities brokerage, third party administration, or valuation services
"Direct compensation" is compensation the CSP receives directly from the plan. "Indirect compensation" is compensation received from any source other than the covered plan, the plan sponsor or an affiliate, the CSP or a subcontractor.
The 408(b)(2) requirements state that disclosures must:
- Be provided in writing to the plan sponsor or other responsible plan fiduciary, but do not have to be in a formal written contract
- Include a description of the services provided and all direct and indirect compensation to be received by a CSP, its affiliates or subcontractors
- State whether services will be provided as a fiduciary, or as a registered investment advisor, if applicable
- Describe the direct compensation the service provider expects to receive (in either dollar amount or as a formula) and the manner of receipt (billed or deducted from plan accounts or investments)
- Include descriptions from recordkeepers of various fees associated with the investment options
- Reveal if service providers are providing recordkeeping services to the plan and the compensation attributable to such services, even if no explicit charge is identified for recordkeeping in the service "package"
- Describe the indirect compensation the service provider expects to receive, the payer of the indirect compensation, the services to which such compensation relates and the arrangement between the payer and the service provider, in order to enable a plan sponsor or other responsible plan fiduciary to assess potential conflicts of interest
- Describe any termination service charges
A CSP must provide the disclosures to the plan sponsor or other responsible plan fiduciary within a reasonable amount of time before the contract or arrangement is entered into, extended or renewed. Subsequent material changes to plan-related fees and expenses must be provided as soon as possible, but not more than 60 days from the date the service provider has knowledge of the change. Changes to investment-related fees and expenses must be disclosed annually.
The regulations were effective July 1, 2012.
Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. It was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under US federal tax laws. Federal and state tax laws are complex and change frequently.
The opinions in this piece are not necessarily those of Invesco. Information in this piece does not pertain to any Invesco product and is not a solicitation for any product.