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Practice Management > Compensation and Fees

Proposed Plan Regs Require Glimpse Inside The Bundles

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The Employee Benefits Security Administration wants providers of bundled benefit plan services to give plan fiduciaries specific information about some vendors’ compensation.

EBSA, an arm of the U.S. Labor Department, has included a bundled service provider section in a new batch of proposed regulations dealing with pension plan and health and welfare plan fee disclosures.

The proposed regulations would affect the role of a plan fiduciary under Section 408(b)(2) of the Employee Retirement Income Security Act of 1974 in ensuring that the contracts with any plan service providers the fiduciary hires are “reasonable.”

Current regulations define a reasonable contract as one that a plan can terminate on reasonably short notice, officials write in a preamble to the proposed regulations, which appear today in the Federal Register.

Under the proposed regulations, EBSA would provide more detailed advice about how to determine whether a benefit plan provider contract or arrangement was reasonable.

For an arrangement to be reasonable under the proposed regulations, a provider would have to agree to furnish – and actually furnish – the fee information and conflict-of-interest disclosures required by the proposed regulations.

The proposed regulations would apply to 3 groups of service providers.

One would include all plan fiduciaries, and a second would include “service providers who provide banking, consulting, custodial, insurance, investment advisory (plan or participants), investment management, recordkeeping, securities or other investment brokerage, or third party administration services, regardless of the type of compensation or fees that they receive.”

A third category would include “service providers who receive any indirect compensation in connection with accounting, actuarial, appraisal, auditing, legal or valuation service.”

Providers could make required disclosures in any written form, including in an electronic format, as long as fiduciaries responsible for hiring service providers received the information before they entered into contracts or arrangements, officials write.

Compensation And Conflict Disclosure

Service provider compensation disclosure would have to include many different kinds of compensation, including trips, gifts, research and float income, as well as fees and commissions.

The Labor Department “believes that an investment of plan assets or the purchase of insurance is not, in and of itself, compensation to a service provider for purposes of this regulation,” officials write. “However, persons or entities that provide investment management, recordkeeping, participant communication and other services to the plan as a result of an investment of plan assets will be treated as providing services to the plan.”

Service providers would have to disclose compensation or fees received by their affiliates from third parties, officials note.

The Labor Department does not want to requiring double counting of compensation, but “disclosure of any direct or indirect compensation that otherwise is required under the proposal cannot be avoided merely because such compensation is paid to an employee or agent of the service provider or an affiliate, rather than directly to such service provider or affiliate,” officials write.

Conflict-of-interest disclosures would have to include reports about relationships or interests that the service provider has in connection with past transactions, material relationships with other parties, and any compensation that the provider can receive without prior approval by an independent fiduciary.

A service provider also would have to tell the plan fiduciaries whether it would see itself as a fiduciary or a non-fiduciary.

Providers would have to supply the sorts of compensation information and other information necessary to fill out a benefit plan Form 5500 tax form even if a plan were too small to be subject to Form 5500 filing requirements, officials write.

Bundled Services

Large financial services companies that provide bundles of plan services and trade groups representing firms that arrange for services on an a la carte basis have been wondering for months about how EBSA’s fee disclosure regulation proposal would treat reporting of bundled services fee arrangements.

Bundles services providers have argued that all plan fiduciaries really need is the cost of the bundle as a whole, not the cost of individual services within the bundle.

The Council of Independent 401(k) Recordkeepers, Arlington, Va., and other groups have contended that allowing providers to report one price for an entire bundle of services could conceal important information and make a la carte arrangements look more expensive than they are.

Under the proposed regulation, a bundled service provider would be responsible for making the required fee and conflict-of-interest disclosures, regardless of who was providing specific services.

In addition, “the bundled service provider must disclose the aggregate direct compensation or fees that will be paid for the bundle, as well as all indirect compensation that will be received by the service provider, or its affiliates or subcontractors within the bundle, from third parties,” officials write.

A bundled provider would have to provide separate disclosures about “the compensation or fees of any party providing services under the bundle that receives a separate fee charged directly against the plan’s investment reflected in the net value of the investment, such as management fees paid by mutual funds to their investment advisers, float revenue, and other asset-based fees such as 12b-1 distribution fees, wrap fees, and shareholder servicing fees if charged in addition to the investment management fee.”

The proposed regulations also would require separate disclosure of “compensation or fees of any service provider under the bundle that are set on a transaction basis, such as finder’s fees, brokerage commissions or soft dollars,” officials write. “Compensation or fees that are charged on a transaction basis must be separately disclosed even if paid from mutual fund management fees or other similar fees.”

The Labor Department does not believe the proposed fee disclosure requirements would require bundled providers to disclose any revenue-sharing arrangements or bookkeeping practices among affiliates that could legitimately be classified as proprietary or confidential, officials write.

In most other cases, officials write, the bundled provider would not have to break down information about compensation or fees for the individual services in the bundle.

A provider would not, for example, have to provide separate information about the cost of preparing the Form 5500 annual report and the cost of preparing participant statements, officials write.

In most cases, officials add, a bundled provider would not have to disclose the allocation of revenue-sharing or other payments among affiliates or subcontractors within a bundle.

Service providers that violated the regulations would have to pay excise taxes, and fiduciaries that violated the regulation when hiring service providers would be violating ERISA prohibited transaction rules, officials write.

EBSA today published a proposed class exemption along with the proposed regulations. The class exemption would help plan fiduciaries cope with situations in which service providers fail to make required disclosures.

The proposed regulations would affect more than 760,000 plans, including 86,000 health and welfare plans and about 676,000 pension plans, officials estimate.

EBSA wants the regulations to take effect for plans and service providers of all sizes at the same time, because of a belief that small plans need fee disclosure information as much as large plans do, and a belief that compensation arrangements and conflicts of interest at small service providers are about as complex as the arrangements at large providers that supply similar services, officials write.

Public comments on the proposed regulations are due Feb. 11, 2008.

A copy of the proposed fee disclosure rule is available ‘>Document Link

A copy of the proposed class exemption is available


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