Disclosure Requirements

<div class="Section1">The final regulations define a responsible plan fiduciary as a fiduciary who has the authority to cause a plan to enter into or extend a contract or agreement with a service provider. Most plan documents assign this responsibility to the plan administrator, which, under the terms of the plan, may be the employer. The regulations do not appear to provide any special protections for fiduciaries other than a responsible plan fiduciary.<a href="#_ftn1" name="_ftnref1">¹</a><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. Labor Reg. &sect; 2550.408b(c)(1)(viii).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Final regulations require that plan administrators who are required to file at least 250 returns file certain reports electronically. These reports include statements, returns and reports under IRC Section 6057 (relating to deferred vested retirement benefits, IRC Section 6058 (filings required in connection with deferred compensation plans), and IRC Section 6059 (filing requirements for periodic actuary reports).<br /> <br /> With respect to IRC Section 6057 filings, the new requirements apply for filings required for plan years that began on or after January 1, 2014, but only if the filing deadline was on or after July 31, 2015. With respect to filings required under IRC Sections 6058 and 6059, the new requirements apply for plan years that began on or after January 1, 2015, but only for filings with a deadline after December 31, 2015.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. TD 9695.<br /> <br /> </div></div><br />

<div class="Section1">Whether a disclosure is required in any factual situation will be based on whether a plan is a covered plan and whether brokerage services fall into one of the covered categories of services. If a broker is selling a security to a covered plan with no participant direction, such as a defined benefit pension plan, and the broker or an affiliate is not receiving any indirect compensation, then the broker&rsquo;s services do not fall into any of the five categories identified in the regulations. So long as a broker is not acting as a fiduciary to a plan, no disclosure is required.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> If a broker also provides assistance on enrollments, distributions, and participant loans, then the broker could be providing a service classified as recordkeeping services. There still are no disclosures assuming the factors above and that the plan is a defined benefit pension plan. The triggering event for disclosure of recordkeeping services occurs when a plan has a designated investment alternative or a broker, affiliate, or subcontractor of a broker receives indirect income. The same results would apply if a plan was a profit sharing plan without participant directed investment, so long as there is no payment of indirect income to a broker, affiliate, or subcontractor.<br /> <br /> If a broker instead sells a mutual fund to a defined benefit pension plan and the mutual fund pays indirect compensation to the broker or the brokerage firm, then the broker falls into the category triggered by receipt of indirect compensation and certain disclosures relating to the indirect compensation are required. If a broker also provides recordkeeping services, then the broker must provide the disclosures for recordkeeping services.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. Labor Reg. &sect; 2550.408b(c)(1)(ii).<br /> <br /> <br /> <br /> </div></div><br />

<div class="Section1">A covered service provider is required to disclose any change to a responsible plan fiduciary as soon as is practicable but not later than 60 days from the date the service provider is aware of the change. Where such disclosures are late due to circumstances beyond the control of the service provider, the information must be disclosed as soon as practicable.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> In addition, if a responsible plan fiduciary requests information that is necessary to comply with a reporting requirement or is required for its own evaluation of the arrangement, a service provider must furnish that information. The preamble to the regulations discusses the additional information a responsible plan fiduciary may need to acquire to carry out the required duties. The regulations discuss the need for a service provider to promptly provide information that is requested. In this regard, a service provider must disclose the information no later than 30 days following receipt of a written request from a responsible plan fiduciary unless the disclosure is delayed due to extraordinary circumstances beyond the service provider&rsquo;s control, in which case the information must be provided as soon as practicable.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. Labor Reg. &sect; 2550.408b(c)(1)(v)(B).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. Labor Reg. &sect; 2550.408b(c)(1)(v)(A).<br /> <br /> </div></div><br />

<div class="Section1">The stated purpose of the regulations is to address the reasonableness of a service provider&rsquo;s arrangement with a plan. The regulations state &ldquo;no contract or arrangement for services between a &lsquo;covered&rsquo; plan and a &lsquo;covered service provider&rsquo; is reasonable within the meaning of ERISA Section 408(b)(2) unless the requirements of the regulation are satisfied.&rdquo; A reasonable arrangement, for purposes of these regulations, is one where a covered service provider provides certain required disclosures to a plan fiduciary. If the disclosures are not provided, the arrangement is not reasonable and will constitute a prohibited transaction unless properly corrected.<a href="#_ftn1" name="_ftnref1">¹</a> The actual details of the fees paid for the services provided must also be considered when determining whether a service provider agreement is reasonable.<div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. Labor Reg. &sect; 2550.408b(c)(1)(i).<br /> <br /> </div></div><br />

<div class="Section1">The regulations give service providers latitude in how they disclose the compensation they receive. A fiduciary who needs more information to ascertain the reasonableness of an agreement would request such information in accordance with the notification process in the regulations. The fee disclosures may be an estimate of the compensation and can be expressed as a monetary amount, formula, percentage of the covered plan&rsquo;s assets, a per capita charge for each participant or beneficiary, or, if the compensation cannot reasonably be expressed in these terms, by any other reasonable method. This disclosure, in whatever form it is provided, must contain sufficient information to permit evaluation of the reasonableness of the compensation by the responsible plan fiduciary.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> Since the effective date of the final 408(b)(2) regulations, the Department of Labor has been reviewing service provider&rsquo;s disclosures and has proposed an amendment to the regulations which would now require that plan sponsors issue a &ldquo;guide&rdquo; to their disclosure packages. The guide is designed to allow plan fiduciaries to quickly and easily find their specific disclosures in what has proven to be voluminous pages of paperwork plan service providers have used as their disclosure packages.<br /> <br /> <hr><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. Labor Reg. &sect; 2550.408b(c)(1)(iv)(E).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> In addition to requiring covered service providers to disclose their compensation and service arrangements, a responsible plan fiduciary is responsible for collecting these disclosures from service providers. The regulations provide an exemption permitting a responsible plan fiduciary to escape prohibited transaction liability if a covered service provider does not provide the required disclosures.<br /> <br /> For a responsible plan fiduciary to be exempt from the prohibited transaction rules under these disclosure regulations, a plan fiduciary must not know that a covered service provider failed to provide complete disclosure. If a fiduciary discovers that a covered service provider has not fully disclosed its compensation arrangements, a responsible plan fiduciary must request that the covered service provider make full and complete disclosures. If, after 90 days after the date of the request, the service provider has failed to comply with the disclosure request, the responsible plan fiduciary then is required to report the failure to comply with the disclosure requirements to the DOL within 30 days of the service provider&rsquo;s refusal to comply with the request, or 90 days after the request for complete disclosure was made.<br /> <br /> On the failure or refusal to respond to the request for disclosure, the responsible plan fiduciary must evaluate the nature of the failure, the availability, qualifications, and cost of replacement service providers, and the covered service provider&rsquo;s response to notification of the failure.<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> If the requested information relates to future services and is not disclosed promptly after the end of the 90-day period, the responsible plan fiduciary is required to terminate the arrangement with the covered service provider prudently and as soon as practically possible.<br /> <br /> <hr><br /> <br /> <br /> <br /> </div><br />

<div class="Section1">A service provider must deliver the required information before the agreement or contract is consummated. Provider relationships in existence on July 1, 2012 were required to deliver the appropriate disclosures by that date. That is, there is no grace period for meeting these requirements where contracts already were in place on the effective date of the regulations.<a href="#_ftn1" name="_ftnref1">¹</a><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. Labor Reg. &sect; 2550.408b(c)(1)(iv)(E).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Brokerage services are covered services so that the broker is required to disclose compensation arrangements under Section 408(b)(2) if the services are provided to an individually directed plan where one or more designated investment alternatives are made available. Essentially, if a plan offers a menu of investments in which participants must invest, then the services would be covered services that trigger the disclosure obligations under the regulations. If a plan permits individually directed accounts but does not have designated investment alternatives, the plan may not be required to provide disclosures under the recordkeeping and brokerage sections of the DOL regulations.<br /> <br /> The disclosure requirements apply even if a broker is not selling the designated investment alternative to a plan. This situation could arise in the case of a broker working with a single participant who has elected to use a window allowing the participant to buy securities outside the plan&rsquo;s core funds available to other participants. Because the plan has a core group of investments, it is treated as having a designated investment alternative. If a broker also assists with distributions, loans, calculation of vesting, or enrollments, additional disclosures will be required for these recordkeeping services.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.Labor Reg. &sect; 2550.408b(c)(1)(ii).<br /> <br /> </div></div><br />

<div class="Section1" style="text-align: center"><strong>Investment Disclosure</strong><div class="Section1"><strong><br /> </strong>Fiduciaries providing services to an investment or entity into which the plan invests must disclose the following types of information:<a href="#_ftn1" name="_ftnref1">¹</a><br /> <p style="padding-left: 40px">(1) a description of all compensation that will be charged directly against the amount invested in connection with the acquisition, sale, transfer of, or withdrawal from the investment contract, product, or entity, for example, sales loads, sales charges, deferred sales charges, redemption fees, surrender charges, exchange fees, account fees, and purchase fees;</p><br /> <p style="padding-left: 40px">(2) a description of the annual operating expenses (for example, the expense ratio), but only if the return on the investment is not fixed; and</p><br /> <p style="padding-left: 40px">(3) a description of any ongoing expenses in addition to annual operating expenses (for example, wrap fees, mortality, and expense fees). In most cases these disclosures will be met through another service provider that will be providing the information to the responsible plan fiduciary. Organizations providing this type of information include fiduciaries for entities such as collective trusts, partnerships, and hedge funds.</p><br /> <p style="text-align: center"><strong>Recordkeeping Services</strong></p><br /> When a covered service provider provides any recordkeeping services, certain additional disclosures are required. The regulations define recordkeeping services to include any &ldquo;services related to plan administration and monitoring of plan and participant and beneficiary transactions (e.g., enrollment, payroll deductions and contributions, offering designated investment alternatives and other covered plan investments, loans, withdrawals and distributions); and the maintenance of covered plan and participant and beneficiary accounts, records, and statements.&rdquo;<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> These disclosures must include:<br /> <p style="padding-left: 40px">(1) A description of all direct and indirect compensation that the service provider, an affiliate, or a subcontractor reasonably expects to receive in connection with the recordkeeping services.</p><br /> <p style="padding-left: 40px">(2) If the service provider reasonably expects the recordkeeping services to be provided, in whole or in part, without explicit compensation for such recordkeeping services or when compensation for recordkeeping services is offset or rebated based on other compensation received, an additional disclosure is to be provided. The service provider must provide a reasonable and good faith estimate of the cost to the plan of such recordkeeping services without offset that includes both an explanation of the methodology and assumptions used to prepare the estimate. This estimate shall take into account either (1) the rates that the covered service provider would charge to perform these services or the rates that would be charged for a third party, or (2) the prevailing market rates charged for similar recordkeeping services for a similar plan with similar number of participants.</p><br /> <br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> These specific disclosures will be required for most bundled service providers that provide multiple services and are paid in whole or in part through indirect compensation (for example, 12b-1 fees and subtransfer agency fees). Under this disclosure requirement, a recordkeeper that receives indirect compensation and then offsets the amount received against the provider&rsquo;s stated fee, or that gives credits against its recordkeeping fees, must disclose the reasonable charge for those services as if there was no revenue sharing being paid.<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> This level of disclosure will impact bundled providers that have provided certain settlor services on a no charge basis while at the same time collecting indirect compensation for other plan services. These regulations seem to be prohibiting such a provider from offering any free services when the provider receives indirect compensation. An interesting fallout may be that plan sponsors will need to start paying for their document services when a plan is set up. A plan sponsor may not offset the cost to perform settlor services with any revenue sharing because a plan cannot pay settlor costs. Settlor services include drafting the initial plan document and making plan amendments that primarily benefit the employer.<br /> <br /> <hr><br /> <p style="text-align: center"><strong>Investment Disclosure for Certain Participant Directed Plans</strong></p><br /> Where recordkeeping and brokerage services are provided to a plan in which the participants have at least one designated investment option available to them, or where indirect compensation is being paid by the plan, a separate disclosure is required for each designated investment option available. This disclosure must include the same investment information that is required for fiduciaries that provide services to investments in which the plan invests, as explained above.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. Labor Reg. &sect; 2550.408(b)(c)(1)(iv)(F).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. Labor Reg. &sect; 2550.408(b)(c)(1)(iv)(G).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. Labor Reg. &sect; 2550.408b(c)(1)(iv)(G).<br /> <br /> </div></div><br />