Benefit Strategies
Service Provider Disclosure In The Absence Of Final Regulations
We are still waiting for the Department Of Labor to issue final regulations on ERISA section 408(b)(2) concerning disclosure of services, compensation and conflicts of interest for service providers to retirement plan sponsors. In the meantime, should plan sponsors retain their current contract and disclosure practices that do not meet the DOL’s proposed requirements?
The proposed regulation explains the exemption from prohibited transaction, requiring contracts and arrangements between plan sponsors and service providers to be “reasonable.” In order to meet this standard, DOL says that contracts must be in writing, and there must be advance disclosure of the service provided, the compensation to be received for those services and potential conflicts of interest that could impact the services being provided.
Over the last year plan providers and advisors have been waiting for final regulations to be issued or for legislation to be introduced that may impose even tighter standards. The question for plan sponsors is: should they proceed with the requirements as proposed or should they wait until clarification from the final regulations is released?
According to Fred Reish and Bruce Ashton, ERISA attorneys with Reish Luftman Reicher & Cohen, plan sponsors should proceed with the regulations as proposed for three reasons:
• ERISA exempts certain otherwise prohibited activities between plan sponsors and interested parties provided certain requirements are adhered to. Fiduciaries have an obligation to ensure that compensation arrangements are reasonable. Disclosure of the basic service arrangements is an integral part of the prudent fiduciary process, as well as the exemption process for prohibited transaction relief.
• Schedule C of the 5500 Form requires direct and indirect reporting of revenues received by service providers during the plan year, starting in 2009. Simplified reporting of eligible indirect compensation arrangements will be permissible provided the service provider discloses in detail in advance the amount or a description of the formula used to compute the compensation, as well as the identity of the parties paying and receiving the compensation. ERISA Section “408(b)(2)-like procedures will be required to be made to plan sponsors or the sponsor will be required to report, as public record, the extensive information about the indirect compensation of the service provider.”1
• Transparency of compensation and conflicts of interest is simply a best practice, regardless of whether it is required. For plan sponsors, this can be seen as a defensive move in an environment where litigation and regulation is on the rise. For service providers, transparency will continue to become a competitive advantage.
No matter which form the final regulation may take, disclosure is valuable for risk management purposes, assists in meeting reporting requirements for larger plans, and is consistent with best practices.
In our experience, most plan sponsors have done a poor job of documenting any of their fiduciary processes. An attitude of blind faith and not wanting to open a can of worms seems to prevail among retirement plan sponsors. If you suspect that your disclosure policies will not meet the proposed standard, please give Don Potter a call at 540-989-2020 for a free evaluation today. Benefit Strategies will be able to quickly determine if your plan has the detailed written disclosures necessary to meet the letter and spirit of these pending requirements.
1 Reish Luftman Reicher & Cohen Bulletin January 12, 2009, Update on Service Provider Disclosure Under 408(b)(2)