By: Rich Banner, CPA
In 2010, the Employee Benefits Security Administration of the U.S. Department of Labor published a ruling meant to enhance required disclosures made by service providers to employee benefit plans as part of a “reasonable” arrangement for services (Section 408(b)(2) of ERISA). Also published in 2010 was a companion ruling under Section 404(c), requiring certain disclosures to participants and beneficiaries in participant-directed individual account plans (e.g., 401(k) plans.)
Along with the increased transparency surrounding the selection and monitoring of service providers, the new regulations also subject service providers to a new set of disclosures. The following will provide details regarding these regulatory changes. The final rules, in their entirety, can be found under the Final Rule section in the EBSA web site.
The regulations define service providers as those entities that provide the following services to employee benefit plans: banking, consulting, investment advisory and management, insurance, custodial services, record-keeping, securities or investment brokerage, or third-party administration. These are the parties that are directly compensated by the plan or the plan sponsor for their services. The regulations also incorporate providers that may receive indirect compensation for services such as actuarial, accounting, auditing, legal or valuation services.
The new set of disclosures that service providers will be required to make focus mainly on fees and services provided. Service providers will be required to provide more detailed information regarding fees deducted from participant accounts and how fees are calculated. Services provided and how providers are compensated will be required to be disclosed as well. Also, information regarding any conflicts of interests that may exist must be disclosed. The burden of these disclosure requirements rests with the service providers.
Another requirement found in the new regulations is a requirement that employee benefit plans get written contracts with all of their service providers. The items required to be disclosed above should be incorporated into these agreements. Employee benefit plans should take the time to identify those who provide services and make sure that the relationship with the providers is in writing.
If service providers are deemed to be in violation of the disclosure requirements, they become a “disqualified person” under the Internal Revenue Code's prohibited transaction rules. Violators are subject to excise taxes as set forth by the Code. Plans that receive services from a provider who is considered a “disqualified person” will be participating in a prohibited transaction which must be disclosed in Form 5500. Also, a prohibited transaction may result if a benefit plan does not have a written contract with a provider.
The effective dates for implementation of the requirements outlined above are staggered. The disclosure of fee information and services provided to participants and beneficiaries in participant-directed plans is effective January 2012. The requirement for written contracts between employee benefit plans and service providers is effective April 2012. As these new disclosure requirements have been made widely available to those who provide services to employee benefit plans, many service providers have been proactive in taking steps to adhere to the new rules. However, plan sponsors should identify all of the service providers to their plans and work with those providers and with plan counsel in ensuring that the plan is operating in compliance with the new regulations.
Rich Banner is a manager in the Firm’s Audit and Assurance Services department and can be reached at email@example.com.