Detailed fee information needed for benefit plans

Employers that do not take steps to ensure that they have the right kind of benefit-plan fee information in their file – and in their contracts – could face significant penalties as early as January 2009. There are straightforward and cost-effective means to avert these penalties, however, so long as employers take the initiative and act quickly.
For years, the U.S. Department of Labor (DOL) has suggested that ERISA plan sponsors and plan participants pay more attention to benefit-plan fees in order to meet their fiduciary obligations. This has become a hot-button issue with regulators, particularly in light of recent events surrounding investment banks and mutual funds. Beginning very soon, paying attention to fees will no longer be a mere suggestion.
The IRS and the Department of Labor have implemented fee-disclosure changes for Form 5500 Schedule C. These changes take effect for plan years beginning after Jan. 1, 2009, and therefore the fee information must be captured for 2009. These changes require significant and detailed information about fees in excess of $5,000 paid by qualified plans to service providers. Employers need to ask for, review and receive detailed fee information to meet this new obligation.
The Form 5500 changes do not apply to all ERISA plans, including some welfare plans. However, the DOL also has issued proposed regulations within the last few months that would apply to all ERISA plans, including 401(k), 403(b), defined benefit, group health and other welfare plans. This new regulation, if finalized, will require employers to obtain significant, detailed fee information from a whole host of service providers, such as banks, consultants, custodians, insurers, third-party administrators, brokers, investment managers and record keepers. It will require disclosure of all compensation and fees, both direct and indirect, paid to the service provider or an affiliate. This includes (for example) gifts, awards, research, finder’s fees, placement fees, commissions, sub-transfer agency fees, shareholder servicing fees, Rule 12b-1 fees, soft-dollar payments, float income fees deducted from investment returns and fees based on a percentage of plan assets. Even bundledservice arrangements must disclose particular types of fees, such as transaction fees.
In addition, the new regulation will require that service providers disclose to plan sponsors certain information about potential conflicts of interest. Information will include financial or other interests in transactions with the plan; relationships with other parties (such as investment professionals, other service providers, or clients) that might give rise to conflicts of interest; and situations in which a service provider can affect its own compensation without review of an independent plan fiduciary. This information, once obtained, will need to be carefully analyzed in light of the plan’s (and potentially the employer’s) conflict of interest policy. This is especially important for publicly traded and tax-exempt organizations, which must comply with conflict of interest requirements beyond those imposed by ERISA.
Finally, the new regulation requires that the contract between the plan and these service providers be updated to require and reflect these new disclosures.
Most of the obligations imposed here fall on service providers. However, employers that sponsor plans and other ERISA fiduciaries who do not comply with the regulation could be found to have committed a prohibited transaction and face significant penalties as a result. The DOL has proposed a type of safe harbor for these fiduciaries if the service provider does not fully disclose as required by the new rules. However, the safe harbor will protect fiduciaries only if they proactively seek out the appropriate information and act on it.
This matter is made more urgent in light of an executive order recently issued by President Bush requiring that, except in extraordinary circumstances, agencies issue final regulations by Nov. 1, 2008 if they want them to take effect before the next administration takes office. This makes it much more likely that the fee regulation will become final this year and take effect as early as January.
While there may be some changes to the proposed fee regulations, many aspects are likely to remain the same, particularly to the extent that they mirror and complement the change to Form 5500. In any event, the Form 5500 and proposed fee regulation provide insight into the thinking of the regulator concerning the minimum level of due diligence required for plan sponsors to satisfy their fiduciary duties in selecting and monitoring service providers. The level of detail that the regulations require goes far beyond what most service providers currently volunteer and outstrips what most plan sponsors require in their contracts.
As a result, employers should take action, and quickly, to be ready to implement the changes if required in early 2009. These actions would include:
• Identifying all ERISA plans subject to the Form 5500 and proposed fee regulations;
• Identifying the service providers to each plan;
• Reviewing the contracts with service providers;
• Obtaining written disclosures; and
• Determining whether any further action is required. •
Kimberly I. McCarthy is a partner at Partridge Snow & Hahn LLP. She has extensive experience and expertise in the areas of federal and state tax, ERISA/employee benefits, and health care regulatory issues. She can be reached at kim@psh.com.