Effective July 1, 2012, agreements between retirement plans and
plan service providers must describe most direct and indirect fees
associated with the services in writing in order to avoid
"prohibited transaction" penalties under ERISA. Effective
October 1, 2012, plan fiduciaries are required to disclose to plan
partici¬pants all fees that can affect plan balances. This
article discusses the first of these rules, and we will discuss the
second in an upcoming article.
The rationale for requiring fee disclosures comes from
ERISA's mandate that expenses paid by a plan be
"reasonable." The multitude of fee arrangements that have
developed in the retirement plan industry can make it difficult for
a plan fiduciary to determine what all the service fees are. Plan
fiduciaries will need this information both to ensure contracts for
services are reasonable and in order to fulfill the responsibility
to disclose the fees to participants. Service providers must
disclose the fees for services in writing to avoid imposition of a
15% "prohibited transaction" excise tax.
Most retirement plans, including 401(k), profit sharing,
pension, and most 403(b) plans, but not SEPs, SIMPLE plans, or
IRAs, are subject to these rules.
A covered service provider ("CSP") for purposes of
these rules is a person or entity that reasonably expects to
receive $1,000 or more in direct or indirect compensation for most
services provided to a retirement plan, whether provided by the CSP
directly or through an affiliate or subcontractor. These include:
services as a fiduciary or registered investment adviser;
recordkeeping and brokerage services to individual account plans
that permit participants to direct plan investments; and indirect
compensation for other services, such as accounting, auditing,
actuarial, appraisal, banking, consulting, custodial, insurance,
investment advisory, legal, recordkeeping, securities or other
brokerage, third party administration, or valuation services.
Cer¬tain payments are not subject to these requirements (for
example, amounts paid by the employer sponsor¬ing the plan
directly to a TPA for a limited service arrangement encompassing
only compliance testing and Form 5500 preparation).
Direct compensation may be disclosed either in the aggregate
(i.e., listing all services and the aggregate fee) or by service
(broken down). Disclosures of indirect compensation must identify
the services as well as the payer of the indirect compensation and
a description of the arrangement between the payer and the CSP,
affiliate, or subcontractor.
The CSP generally must provide initial fee and service
disclosures reasonably in advance of the effective date of a
contract or arrangement for services and again when the information
changes. Where a CSP fails to provide the required notices, the
regulations specify the actions a plan fiduciary should take to
remedy the failure.
Although the Department of Labor rules do not specify the
methodology for determining reasonableness of fees, some plan
Administrators are using the proposal process to determine whether
fees for services of a given provider are reasonable by comparing
costs for similar services from different providers.
There are many fee arrangements applicable to retirement plans.
Each plan contract or arrangement for services must be examined and
analyzed to ensure all compensation is captured, described, and
disclosed in accordance with ERISA.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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