On July 14, the U.S. Department of Labor (DOL) released a list of 40 frequently asked questions (FAQs) and answers regarding compliance with the new reporting requirements for service provider fees included in the revised Schedule C of the 2009 Form 5500. Among other things, the FAQs provide relief to service providers who have been struggling to modify their recordkeeping and information management systems in a timely fashion to comply with the new reporting requirements for the 2009 plan year.
In November 2007, the DOL’s Employee Benefits Security Administration (EBSA) imposed new requirements for reporting service provider fees and other compensation on Schedule C (Service Provider Information) of the 2009 Form 5500 Annual Return/Report of Employee Benefit Plan. These new reporting requirements arose out of the DOL’s initiative to increase transparency of service provider fees for plan fiduciaries and administrators who negotiate service provider contracts or make decisions on plan investments. The additional disclosure required by Form 5500 is intended to provide a means for the DOL, plan administrators and plan investment fiduciaries to better monitor the compensation arrangements of plan service providers, understand the impact of fees on plan assets, and evaluate the value of purchased services.
The revised Form 5500, Schedule C for the 2009 plan year requires that administrators of plans covering more than 100 participants and Direct Filing Entities (“DFEs”) (e.g., common and collective trusts, insurance company separate accounts and other investment funds that are considered to hold plan assets and that file Form 5500) report:
- Identifying information for each person who received more than $5,000 in total direct and indirect compensation.
- Descriptions of the services performed and the nature of compensation received (from an expanded list of service codes for the revised Schedule).
- The relation of the service provider to the plan sponsor, participating employer or employee organization, or to any person known to be a party-in-interest with respect to the plan.
- The total amount of direct compensation paid by the plan to the service provider during the plan year.
- Whether the service provider received any “indirect compensation” in connection with the services provided or its position with plan and, if so, if any of this compensation was “eligible indirect compensation.” “Eligible indirect compensation” consists of certain fees or expense reimbursements charged to investment funds and reflected in the value of the investment (such as finders’ fees, soft dollar revenue, float revenue and brokerage commissions) for which the plan administrator has received certain disclosures.
- The total amount of indirect compensation that was not eligible indirect compensation.
- Whether the service provider supplied a formula or other method for determining the amount of some or all of the indirect compensation.
The new Schedule C encourages disclosure of indirect compensation arrangements by easing the reporting obligations for “eligible indirect compensation” that is disclosed to plans—when sufficient disclosures are made to the plan, the plan administrator need only report the identity of the service provider (and not the amount of the compensation) on Schedule C. The schedule also requires that plan administrators identify each service provider that fails or refuses to provide the information necessary to complete the information required for the schedule.
New DOL Guidance
The new DOL guidance consists of 40 FAQs developed in response to questions from the employee benefit community on the new Schedule C requirements. The FAQs address a wide variety of issues regarding the 2009 Schedule C. Examples of the issues addressed in the FAQs include, among other things—
- The alternative reporting option for eligible indirect compensation,
- Electronic disclosure of fee information by service providers,
- Fee reporting for brokerage window options in participant-directed plans,
- Reporting on gift, entertainment and other non-monetary compensation,
- Fees and expenses which are not reportable indirect compensation for Schedule C purposes,
- The treatment of float income and bundled service arrangements, and
- How often disclosures regarding “eligible indirect compensation” need to be provided.
The new DOL guidance also provides relief to service providers who need to modify their current recordkeeping and information management systems in order to be able to provide their benefit plan clients with the fee and compensation information needed to comply with the new Schedule C reporting requirements for the 2009 plan year. Specifically, FAQ 40 provides that the plan administrator will not need to disclose the identity of a service provider who fails to provide information necessary to complete Schedule C for the 2009 plan year if the service provider furnishes the plan administrator with a written statement that (i) the service provider made a good faith effort to make any necessary recordkeeping and information system changes in a timely fashion and (ii) despite such efforts, the service provider was unable to complete the changes for the 2009 plan year.
The full text of the DOL release can be found at the link below.
Plan sponsors, plan administrators and service providers should review the FAQs and the underlying Form 5500 disclosure requirements to begin establishing procedures for the collection of the necessary information.