Continued on next page. 1 Form 5500/Industry Education

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1 RETIREMENT New Rules for Form 5500 INDUSTRY EDUCATION The Department of Labor (DOL) has revised its annual reporting form for qualified retirement plans, increasing fee transparency and delaying the transition to electronic filing, among other changes. The DOL released final revisions to Form 5500 on Nov. 16, The revisions are generally effective for the 2009 reporting year, meaning they won t change the way the form is completed until Some of the changes include: Transitioning to a fully electronic filing system by January Creating a short form (Form 5500-SF) for certain eligible plans with fewer than 100 participants. Stipulating that ERISA 403(b) plans will now be subject to the annual reporting requirements under Title I. But, the biggest change was to Schedule C of the The goal of these changes is to increase fee transparency so plan sponsors and fiduciaries can effectively evaluate and monitor the charges assessed to the plan. According to the DOL, The Department believes that an annual review of plan fees and expenses as part of the annual reporting process is part of a plan fiduciary s ongoing obligation to monitor service provider arrangements with the plan. (p. 8) The following pages explain how the changes to Schedule C will affect reporting requirements. Direct compensation vs. indirect compensation Large plans generally those with 100 or more participants must use Schedule C to report any direct or indirect compensation of more than $5,000. Direct compensation is, generally, paid directly by the plan or plan sponsor (e.g., recordkeeping fees assessed against participant accounts, loan fees and investment management fees reflected in mutual fund expense ratios). Indirect compensation is compensation received from sources other than the plan or plan sponsor. Some examples include: Fees paid by mutual funds for investment advisory services, shareholder servicing fees and 12b-1 fees Brokerage commissions and finders fees Float revenue Soft dollar revenue Continued on next page 1

2 Continued Unless otherwise noted, all quotes, data and information come from the Department of Labor s Revision of Annual Information Return/ Reports, Vol. 72, No There are two types of indirect compensation: eligible and ineligible. Eligible indirect compensation can be reported using an alternative reporting option. To be considered eligible, any indirect compensation paid by the plan must meet both of the following criteria: The compensation must consist of fees or expense reimbursement payments charged to investment funds and reflected in the value of the investment or return on investment of the participating plan or its participants, finders fees, soft dollar revenue, float revenue and/or brokerage commissions or other transaction-based fees for transactions or services involving the plan that were not paid directly by the plan or plan sponsor (whether or not they are capitalized as investment costs). (p. 96) The plan must receive a written statement that discloses and describes the: Existence of the indirect compensation. Services provided for the indirect compensation or the purpose for payment of the indirect compensation. Amount (or estimate) of the compensation or a description of the formula used to calculate or determine the compensation. Identity of the party or parties paying and receiving the compensation. (p. 96) If the plan receives the required written disclosures, the plan doesn t have to report the amount of eligible indirect compensation received. Instead, with respect to the portion of their compensation that is eligible indirect compensation, the plan only needs to identify the person s or persons names and either their employee identification numbers (EINs) or addresses. The written disclosure doesn t necessarily have to be created specifically for this purpose and solely for the use of an individual plan. According to the DOL: For example, 12b-1 fees received by a party providing recordkeeping services to a plan would not have to be separately reported on the Schedule C if the disclosures in the mutual fund prospectus together with disclosures in the service contract advised the plan administrator of the fact that the 12b-1 fees were being received, what the fees were paid for, the amount or estimate of the fees received or the formula used to calculate the amount of the fees received, and the party from whom the recordkeeper was receiving the fees. (p. 12) The plan must: Report the identity of all persons who received more than $5,000 in direct or indirect compensation. Assign a code describing the nature of the services rendered. Identify the relationship of such persons to the plan sponsor, employer/employee organization or a party-in-interest. Disclose the total amount of direct compensation received by the person. Indicate whether the person received any indirect compensation (yes/no). Report the total amount of ineligible indirect compensation. List whether the person provided an actual amount or estimate of the compensation or just a formula for determining it. The plan must report persons who are conflict-of-interest sensitive if they receive $1,000 or more and the plan was given a formula rather than an amount or estimate. These include service providers who are fiduciaries or who provide administration, consulting, investment advisory (plan or participant), investment management, brokerage or recordkeeping services to the plan. 2

3 Schedule C (Form 5500) 2009 In section 1.1, the plan sponsor should check yes if any person or company received only eligible indirect compensation from the plan during the year, then provide the EIN or address of each person or company involved Federal Register / Vol. 72, No. 221 / Friday, November 16, 2007 / Notices Section 1.2 deals with direct or ineligible indirect compensation. For each company or person who provided a service and in return received direct or ineligible indirect compensation, the plan sponsor should list each name and EIN or address, then indicate the appropriate service code (from the list in the Form s instructions), the relationship to the plan, and the amount and type of compensation received, with respect to the questions asked Federal Register / Vol. 72, No. 221 / Friday, November 16, 2007 / Notices 3

4 Schedule C (Form 5500) 2009 Section 1.3 deals only with indirect compensation that is not eligible. For all providers receiving this type of compensation, provide their name and address or EIN, the appropriate service code, the amount of indirect compensation and a description of the compensation Federal Register / Vol. 72, No. 221 / Friday, November 16, 2007 / Notices Unfortunately, plan sponsors may come across service providers that either provide inadequate information or refuse to provide any information at all. In that case, the plan sponsor will use this section to identify those providers and the types of service they provided. Federal Register / Vol. 72, No. 221 / Friday, November 16, 2007 / Notices

5 How the new rules help plan sponsors fulfill their fiduciary obligations While it may seem the new rules just mean more work, the new Form 5500 is actually a great reminder of the importance of a plan sponsor s fiduciary duties. Take this opportunity to: Take a more critical look at the fees the plan is being charged, both directly and indirectly. Check to see if the fees being charged are reasonable. Determine whether any direct or indirect payments present possible conflicts of interest. Your service providers should be prepared to provide and explain fully all necessary information from various bundled and unbundled providers. Your financial adviser, plan consultant and/or legal counsel should have a clear view of all the different fees associated with any revenue-sharing agreements in place and be able to explain them plainly to you. 5

6 Bundled arrangements A bundled arrangement includes any service arrangement where the plan hires one company to provide a range of services either directly from the company, through affiliates or subcontractors, or through a combination, which are priced to the plan as a single package rather than on a serviceby-service basis. (p. 95) It also includes an investment transaction in which the plan receives a range of services either directly from the investment provider, through affiliates or subcontractors, or through a combination. (p. 95) There is a general rule that, in the case of bundled service arrangements, revenue sharing within the bundled group does not need to be separately reported. For example, direct compensation does not have to be broken down to disclose specific subcontractor or affiliate compensation nor reported as indirect compensation received by these affiliates or subcontractors, unless the amount paid is a per-transaction fee. The first exception to the general rule is that any person within the bundled arrangement receiving separate fees charged against the plan s investments (such as investment management fees, float revenue, shareholder servicing fees, 12b-1 fees and wrap fees, if charged in addition to investment management fees) must be treated as receiving separate reportable compensation for Schedule C purposes. The second exception is that compensation must be separately reported if it consists of commissions and other fees paid to each person who is conflict-of-interest sensitive. This speaks to one of the DOL s major goals in providing these new reporting rules: identifying and avoiding conflicts of interest. Consider the investment objectives, risks, and charges and expenses carefully. For this and other information about AIM funds, obtain a prospectus from your financial adviser and read it carefully before investing. Note: Not all products, materials or services available at all firms. Advisers, please contact your home office. On or about April 30, 2010, Invesco Aim Distributors, Inc. becomes Invesco Distributors, Inc., Invesco Aim Investment Services, Inc. becomes Invesco Investment Services, Inc., and AIM funds become Invesco funds. In addition, invescoaim.com becomes invesco.com BRO-1 03/10 Invesco Aim Distributors, Inc.