June 28, 2012
Earlier this year, the U.S. Department of Labor (DOL) finalized new fee disclosure regulations under Section 408(b)(2) of the Employee Retirement Income Security Act of 1974 (ERISA). ERISA requires plan fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries when selecting and monitoring service providers and plan investments. Responsible plan fiduciaries also must make sure that arrangements with their service providers are reasonable and that only reasonable compensation is paid for services.
The spirit of the service provider fee disclosure regulations is to require covered service providers (CSPs) to provide sufficient information to plan fiduciaries to allow them to make informed decisions about an employee benefit plan’s services, the costs of such services, and the conflicts of interest that might affect the service provider’s performance of services.
Overview of the Disclosure Regulations
The regulations apply to any CSP that reasonably expects to receive $1,000 or more of direct or indirect compensation in connection with its services to a covered plan, which includes employee stock ownership plans (ESOPs), other defined contribution plans, and defined benefit plans.
A CSP can include an individual or company that provides:
- Services as a fiduciary or registered investment adviser
- Recordkeeping or brokerage services to an individual account plan that permits participants and beneficiaries to direct the investment of their accounts, if one or more designated investment alternatives will be made available (through a platform or similar arrangement, for example) in connection with such services
- Other services for which indirect compensation (defined below) is received, such as:
- Consulting related to investment policies
- Consulting related to selection of service providers or plan investments, custodial, insurance, investment adviser, legal, recordkeeping, securities or other investment brokerage, third-party administration, or valuation services provided to a plan
Types of Compensation Disclosed
The final regulations include disclosure requirements for direct and indirect compensation. Direct compensation refers to payments made to service providers directly from a plan. For example, if a third-party administrator deducts $30 from each participant’s account for recordkeeping services, such payments would be considered direct compensation because they are paid directly from plan assets. Indirect compensation generally is any compensation (including nonmonetary compensation such as gifts, awards, and trips) received by a CSP from any source other than the plan, the plan sponsor, or an affiliate.
Content and Timing of Disclosures
Compensation must be specified in the disclosure (including a dollar amount, a formula based on plan assets, or a per-participant charge) so that the plan fiduciary can evaluate the total amount of compensation – both direct and indirect – that the CSP will receive. In the case of indirect compensation, the disclosure also must describe the services for which the indirect compensation was received, the payer of the indirect compensation, and the arrangement with the payer.
The fee disclosures apply to existing and new contracts or arrangements and must provide detailed information about the CSP’s services, direct and indirect compensation, and ERISA fiduciary status. The disclosures must be written in a manner that facilitates the plan fiduciary’s evaluation of the information and must be made reasonably in advance of the date a service contract is entered into, but no later than July 1, 2012, in the case of existing arrangements.
Application of Disclosure Regulations to Crowe Services Provided to ESOPs
In most cases, these regulations do not apply to Crowe® ESOP services because Crowe does not fall within the definition of a CSP and does not receive direct or indirect compensation from the plan. Our fees are billed to the plan sponsor and are paid by the plan sponsor or paid from the plan pursuant to the direction of the appropriate fiduciary (that can determine from our invoice the services that were rendered and the fees charged for those services). You should determine if there are any service providers (recordkeeper, auditor, or trustee, for example) for any of your plans, including your ESOP, that may fall within the scope of the regulations and contact them to discuss.
This alert is intended to provide general guidance and awareness about the new DOL regulations, but does not address all aspects of the regulations, and thus is not intended to be relied upon without seeking further advice or review of the regulations.
DISCLOSURE REQUIRED BY U.S. TREASURY DEPARTMENT CIRCULAR 230: Crowe must inform you that any advice in this communication to you was not intended or written to be used, and cannot be used, to avoid any government penalties that may be imposed on a taxpayer.