ADVISORY Employee Benefits

Transcription

1 ADVISORY Employee Benefits F EBRUARY 13, 2012 DOL RELEASES FINAL FEE DISCLOSURE REQUIREMENTS FOR SERVICE ARRANGEMENTS The Department of Labor ( DOL ) has published its final regulation governing the information that a service provider to a retirement plan must disclose with respect to fees and compensation. The regulation makes several significant changes in the interim final rules published in July See Covington Memorandum, Department of Labor Finalizes Fee Disclosure Requirements for Service Arrangements (July 29, 2010) (copy attached). The most significant changes and clarifications in the final regulation are described below. BACKGROUND Under ERISA, an arrangement to provide services to a retirement plan constitutes a prohibited transaction unless it meets certain requirements. Among other requirements, the services must be provided under a reasonable contract or arrangement, and the plan must pay no more than reasonable compensation. Service arrangements that fail to comply with the new fee disclosure requirements will not be deemed reasonable. FEE DISCLOSURE REQUIREMENTS In general, the fee disclosure requirements apply to funded retirement plans that receive services from covered service providers. Covered service providers include fiduciaries, registered investment advisers, and, for services provided in connection with investment alternatives under participant-directed individual account plans, recordkeepers and brokers as well. A covered service provider also includes a person providing accounting, auditing, actuarial, consulting, custodial, investment advisory, legal, recordkeeping, securities brokerage, third-party administration, valuation and other services, but only if the compensation received by the covered service provider is indirect compensation or the compensation is paid among the covered service provider, an affiliate, and/or a subcontractor. Significant Changes The final regulations change or clarify these requirements for covered service providers: Scope of Disclosure Must describe terms of any arrangement under which indirect compensation is paid Reasonable compensation estimates OK Might require disclosure guide in future Coordination with Participant Disclosure Must provide certain information about designated investment alternatives if needed to satisfy participant disclosure rules Pass-through relief available for disclosure material created by regulated issuers Timing of Disclosure Updates to investment-related information provided annually Info needed under other ERISA disclosure rules provided before disclosure deadline Effective Date Fee disclosure rules effective July 1, 2012 Initial participant disclosures due August 30, 2012 First quarterly participant statements due November 14, 2012 BEIJING BRUSSELS LONDON NEW YORK SAN DIEGO SAN FRANCISCO SILICON VALLEY WASHINGTON

2 To comply with the regulation, the covered service provider must disclose the following information to the plan fiduciary in writing: A description of the services to be provided to the plan; Whether the covered service provider expects to act as a fiduciary or registered investment adviser; A description of any direct compensation to be paid to the covered service provider, its affiliates, or its subcontractors; A description of any indirect compensation paid to the covered service provider, its affiliates, or its subcontractors; A description of any compensation that will be paid among the covered service provider, its affiliates, or its subcontractors, if the compensation is paid on a transaction basis (e.g., commissions) or charged directly against the plan s investment (e.g., 12b-1 fees); A description of any compensation that will be paid to the covered service provider, its affiliates, or its subcontractors in connection with the termination of the agreement; and A description of the manner in which the compensation will be received. Additional disclosures are required for certain (1) fiduciaries to investment vehicles that are deemed to hold plan assets, and (2) recordkeepers and brokers to participant-directed individual account plans. In general, if a covered service provider does not furnish the required disclosures prior to entering into the contract, a prohibited transaction could occur, resulting in an excise tax. However, the regulation excuses certain good faith errors and omissions and provides a special exemption for fiduciaries that discover a failure to disclose, request the necessary information, and take certain actions if the information is not provided upon request. The final regulation generally follows the structure of the interim final regulation. However, there are some significant clarifications and changes, as described below. SIGNIFICANT CLARIFICATIONS AND CHANGES IN FINAL REGULATION Investment-Related Disclosures. The final regulation modified the disclosures required for investment options in participant-directed individual account plans. The revised requirement will help plan fiduciaries meet their disclosure obligations to plan participants under the DOL s participant-level disclosure regulations by requiring service providers to supply some of the required information. See Covington Memorandum, New Final Regulations on Disclosure Requirements for Participant-Directed Plans (October 21, 2010). In general, these disclosures must be made by the recordkeeper or broker providing services with respect to the investment option, or, for funds that are not mutual funds, the fund s fiduciary. The additional information that covered service providers must disclose includes the investment s total annual operating expenses (calculated in the same way as required by the participant-level disclosure rule), and all other information about the investment option that must be disclosed in the participant-level disclosure, to the extent that the information is reasonably available to the covered service provider. Brokers and recordkeepers can comply with the requirement to provide fee and expense information by passing through materials or information provided by the issuer of the investment option describing fees and expenses, if the following conditions are satisfied: The broker or recordkeeper may not be an affiliate of the issuer; The issuer must be a regulated financial institution that meets certain criteria; The broker or recordkeeper must act in good faith and must not know that the materials are incomplete or inaccurate; and The recordkeeper or broker must make a statement to the plan fiduciary that it makes no representations regarding the completeness or accuracy of the materials. 2

3 Disclosures of Indirect Compensation. Disclosures of indirect compensation must now include not only a description of the payer of the compensation, but also a description of the arrangement under which the indirect compensation is paid. Timing of Disclosures. In general, initial disclosures must be made reasonably in advance of the date the contract is entered into, and changes must be disclosed within 60 days of the change. The final regulation modifies this rule with respect to investment-related information, where updates must only be provided annually. The deadline for providing information requested by a plan fiduciary has also been changed. Under the interim final rule, this information had to be provided within 30 days; the final regulation requires that the disclosure be made reasonably before the plan administrator needs the information for reporting and/or disclosure purposes (for example, reporting on Form 5500 Schedule C). Guide to Disclosures. The DOL is considering adding a requirement that the covered service provider include a guide to help plan fiduciaries digest information provided in multiple or complex documents. While this requirement is not included in the final rule, the DOL has included a model guide as an attachment to the regulation and indicated that additional guidance in this area is likely. Errors and Omissions. The interim final regulation permitted the covered service provider to correct errors made in initial disclosures, but not in disclosure updates. The final regulation expands this relief by permitting the covered service provider to correct errors made in updates to information previously disclosed. The final regulation also changed the prohibited transaction exemption for fiduciaries that discover a failure by the service provider to disclose information. In general, if the plan fiduciary determines information is missing, it must request the information from the covered service provider, and the covered service provider has 90 days to respond to the plan fiduciary s request for additional information; after the 90-day period the plan fiduciary must report the covered service provider to the DOL for noncompliance. Previously, if the covered service provider did not provide the information promptly after this 90-day period, the plan fiduciary was required to reassess the relationship. Under the final regulation, if the information requested relates to future compensation, the plan fiduciary must terminate the contract. The DOL has also issued a model notice that plan fiduciaries can use to notify the DOL if a service provider has failed to disclose required information. Description of Compensation or Cost. The final regulation revised the conditions under which covered service providers may describe compensation or cost using an estimate. An estimate is permitted only if the compensation or cost cannot otherwise be described (for example, as an amount, formula or percentage of assets) and the covered service provider discloses the underlying methodology and assumptions. Frozen 403(b) Plans. The final regulation exempts certain frozen 403(b) annuity contracts and custodial accounts from the definition of a covered plan. FUTURE GUIDANCE The final regulation applies only to retirement plans. However, the DOL has stated that it is developing fee disclosure rules for welfare plans. Also, as noted above under Guide to Disclosures, the DOL intends to issue additional guidance on the format and manner of presentation for disclosures of compensation. ACTION BY PLAN FIDUCIARIES With respect to existing contracts, plan fiduciaries should take the following steps to ensure compliance with the final regulation: Identify all service providers; Determine which service providers are covered by the final regulation; Evaluate compensation information currently provided by each covered service provider; 3

4 Request additional compensation information to the extent necessary to meet the requirements of the final regulation; Consider whether it is necessary or helpful to obtain information concerning the fees and services offered by other entities for purposes of comparison; and Evaluate the service provider relationship in light of the additional information. To the extent that a covered service provider does not provide the necessary information by July 1, 2012, the plan fiduciary might need to report the noncompliance to the DOL and reevaluate or cancel the contract. For new contracts and contracts that are being renegotiated, plan fiduciaries should review all compensation information and confirm that the disclosure meets the requirements of the final regulation. EFFECTIVE DATE The final regulation is effective July 1, Existing contracts and arrangements must be in compliance by that date, as well as new contracts or arrangements entered into after the effective date. The preamble to the final regulation emphasizes that a fiduciary s general duty of prudence requires the fiduciary to obtain and carefully consider information necessary to determine whether a service arrangement is reasonable. The final regulation does not provide any specific grace period during which fiduciaries may review and evaluate the information they receive from service providers under the new disclosure rules. Accordingly, it appears that fiduciaries responsible for entering into and maintaining service relationships must be prepared to evaluate the information promptly when they receive it from service providers. The DOL recognized that fiduciaries will not be able to provide the participant-level fee disclosures required under regulations issued in 2010 until the fiduciaries receive fee information from service providers. Under a notice issued last July, the initial participant-level disclosures are due 60 days after the effective date of the final fee disclosure regulations. Accordingly, the initial participant-level disclosures will be due on August 30, 2012, and the first quarterly disclosures for calendar-year plans will be due on November 14. Many companies are finding that compliance with the participant-level disclosure requirements involves substantial changes to their existing disclosure documents and procedures, and requires more time than anticipated to implement. Companies might wish to give this issue careful attention well before the initial disclosure deadlines. 4

5 Members of Covington s Employee Benefits & Executive Compensation Practice John Vine jvine@cov.com Scott Macey smacey@cov.com Amy Moore anmoore@cov.com Richard Shea rshea@cov.com Julie Edmond jedmond@cov.com Michael Francese mfrancese@cov.com Robert Newman rnewman@cov.com Seth Safra ssafra@cov.com Kendra Roberson kroberson@cov.com Katherine Mineka kmineka@cov.com Mary DeYoung mdeyoung@cov.com William Woolston wwoolston@cov.com Kathryn Johnson kjohnson@cov.com Jenna Wallace jwallace@cov.com Mike Chittenden mchittenden@cov.com Christen Sewell csewell@cov.com Megan Doyle mdoyle@cov.com Spencer Walters swalters@cov.com Grace Ristuccia * gristuccia@cov.com Kathryn Capone kcapone@cov.com The lawyers in Covington & Burling LLP s Employee Benefits & Executive Compensation Group play a leading role in advising and representing employers on employee benefits and executive compensation matters. We frequently appear before Congress, federal agencies, and federal courts to resolve major issues of law, policy, and finance. Our employee benefits practice covers all types of benefit arrangements, including retirement plans, welfare plans, fringe benefits, equity and incentive compensation, and programs for executives and directors. This information is not intended as legal advice. Readers should seek specific legal advice before acting with regard to the subjects mentioned herein Covington & Burling LLP, 1201 Pennsylvania Avenue, NW, Washington, DC All rights reserved. * Admitted in VA, but not DC; supervised by principals of the firm. Senior Benefits Advisor; not a lawyer. 5