Interim final regulations published by the Department of Labor on July 16, 2010, will require entities that provide services, such as investment advice, to retirement plans subject to ERISA (other than simplified employee pensions, simple retirement accounts, and IRAs) to disclose more information about the compensation they receive for the services beginning July 16, 2011. The new regulations implement section 408(b)(2) of ERISA, which generally prohibits plans from entering into service arrangements that are not "reasonable." Failing to comply with section 408(b)(2) can subject the service provider to excise taxes and the plan fiduciary that approved the arrangement to other sanctions under ERISA. They replace previous regulations that were caught up in the regulatory review that followed President Obama's inauguration and never were finalized. Under the new regulations:
- Entities that act as fiduciaries or U.S. registered investment advisers directly for an ERISA plan, or act as fiduciaries for an investment fund or contract in which ERISA plans invest that is deemed to hold ERISA plan assets (generally because ERISA plan investors exceed 25%), will have to (1) provide a description of the services and a statement that the services will be provided as a fiduciary or registered investment adviser (as applicable), and (2) describe, in writing, any compensation they or any affiliates or subcontractors will (i) receive from the ERISA plan or ERISA fund, (ii) receive from other, unrelated parties in connection with the services, (iii) pay among themselves in connection with the services that either are paid on a "transactional" basis (e.g., commissions, soft dollars and finder's fees) or are charged directly against an investment by the ERISA plan (e.g., Rule 12b-1 fees paid to the investment adviser), or (iv) receive in connection with termination of the service contract. If the entity acts as a fiduciary for an investment fund or contract in which a plan invests directly (i.e., not sub-funds) and that holds ERISA plan assets, the information also must include information about the fees charged in connection with investments in the fund (e.g., sales loads and redemption fees); annual operating expenses (only if the fund's return is not "fixed"), and other ongoing expenses of the fund (e.g., wrap fees, mortality and expense fees).
- Entities that act as recordkeepers or brokers to an ERISA plan, and make designated investment alternatives available to participants under the plan (i.e., not just open-ended "brokerage windows"), will have to disclose the same kinds of information that fiduciaries and investment advisers to the plan must disclose, as described in the preceding paragraph. In addition, with respect to the mutual funds or other investment alternatives they make available, they will have to disclose the same kinds of information about the fees charged by each investment alternative that fiduciaries of funds that hold ERISA plan assets must disclose (e.g., sales loads, redemption fees, and annual operating expenses). If the investment alternative is provided by an unrelated third party, this requirement generally can be satisfied by using any disclosure materials that are "regulated by a state or federal agency." Also, if recordkeeping services are provided in addition to other services, they will have to make separate disclosures concerning the compensation received for the recordkeeping services. Finally, if the services will be provided, in whole or in part, without explicit compensation or if compensation for recordkeeping services will be offset against other compensation, they must provide "a reasonable and good faith estimate" of the cost to the plan of the services.
- Entities that provide certain listed services, including accounting, appraisal, brokerage, custodial, and recordkeeping services, directly to an ERISA plan, and receive any compensation from other, unrelated parties in connection with those services, will have to disclose the same kinds of information that fiduciaries and investment advisers to the plan must disclose, as described above.
The regulations will go into effect July 16, 2011, but will apply to all service arrangements in effect at that time, i.e., existing arrangements are not grandfathered and must come into compliance at the same time.
The disclosures required by the new regulations substantially overlap the disclosures now required on Schedule C of the Form 5500, but, unlike those disclosures, are required at the outset of the arrangement rather than after the end of each plan year. The new regulations specifically require service providers to provide, upon request, any information needed by the plan administrator to fill out Schedule C.