Disclosure Regulations for Retirement Plan Service Providers

<p class="PA">To meet their fiduciary duties, the plan administrator of “covered individual account plans” must comply with the disclosure requirements of Section 404(a)(5).</p><br /> <p class="PA">Covered individual account plans include any defined contribution plan (as defined by Section 3(34) of ERISA) which permits plan participants or beneficiaries to direct investment of their plan assets. If a plan participant or beneficiary is permitted to direct only a portion of their account balance, while another portion of the account balance is trustee directed, the plan fiduciary need only comply with the disclosure requirements with respect to the assets that the plan participant has the right to direct.</p><br /> <p class="PA">SEPs, SIMPLEs, and defined benefit plans are not subject to these disclosure requirements.</p><br /> <p class="PA" style="margin-bottom: .0001pt;">The disclosures must be made to the plan participants or beneficiaries who have the right to direct their investments under the plan.</p>

<div class="section1"><br /> <p class="PA"><span style="letter-spacing: -.1pt;">On or before the date on which a participant or beneficiary can first direct plan investments, and annually thereafter, the plan administrator must disclose any fees and expenses that can be charged against the participant’s investment account for services provided on an individual basis. Examples for which this disclosure would apply include loan fees, QDRO processing, or distribution fees.</span></p><br /> <p class="PA">On a quarterly basis, the plan administrator must provide the participants or beneficiaries an accounting of the dollar amount of the fees and expenses charged against the account for individual services deducted in the preceding quarter, as well as a description of the services provided.</p><br /> <p class="PA" style="margin-bottom: .0001pt;">If there are any changes to the disclosed information, the participant or beneficiary must be given notice of the change at least 30 but no more than 90 days before the effective date of the change. However, if circumstances present themselves to prevent disclosing changes to this information within the appropriate time frame, the plan administrator must issue a notice describing the changes as soon as practicable.</p><br /> <br /> </div>

<div class="Section1"><br /> <br /> On or before the date that a plan participant or beneficiary can first direct their investments, and annually thereafter, the plan administrator must provide them with “General Disclosures” describing:<br /> <p style="padding-left: 40px;">(1)     an explanation of the circumstances under which participants and beneficiaries may give investment instructions;</p><br /> <p style="padding-left: 40px;">(2)     an explanation of any specified limitations on such instructions under the terms of the plan, including any restrictions on transfer to or from a designated investment alternative;</p><br /> <p style="padding-left: 40px;">(3)     a description of or reference to plan provisions relating to the exercise of voting, tender, and similar rights appurtenant to an investment in a designated investment alternative as well as any restrictions on such rights;</p><br /> <p style="padding-left: 40px;">(4)     an identification of any designated investment alternatives offered under the plan;</p><br /> <p style="padding-left: 40px;">(5)     an identification of any designated investment managers; and</p><br /> <p style="padding-left: 40px;">(6)     a description of any “brokerage windows,” “self-directed brokerage accounts,” or similar plan arrangements that enable participants and beneficiaries to select investments beyond those designated by the plan.</p><br /> If there are any changes to the disclosed information, the participant or beneficiary must be given notice of the change at least 30, but no more than 90 days, before the effective date of the change. However, if circumstances present themselves to prevent disclosing changes to this information within the appropriate time frame, the plan administrator must issue a notice describing the changes as soon as practicable.<br /> <br /> </div>

<div class="Section1"><br /> <br /> A designated investment alternative is any investment alternative designated by the plan into which participants and beneficiaries may direct the investment of assets held in, or contributed to, their individual accounts. Designated investment alternatives do not include “brokerage windows,” “self-directed brokerage accounts,” or similar plan arrangements that permit plan participants and beneficiaries to select investments beyond those designated by the plans.<br /> <br /> Generally, a model portfolio is not considered a designated investment alternative if it is clearly presented to the participants and beneficiaries as merely a means of allocating account assets among specific designated investment alternatives. However, if in choosing a model portfolio, the plan participant acquires an equity security, unit participation, or similar interest in an entity that invests in some combination of the plan’s designated investment alternatives, the model portfolio would then be considered a designated investment alternative.<br /> <br /> </div>

<div class="Section1"><br /> <br /> The answer to this question assumes that the service provider did not make the appropriate corrections within 30 days and that a prohibited transaction occurred. There are no IRS regulations that specify how to correct a prohibited transaction under IRC Section 4975. The IRS generally applies the prohibited transaction rules that apply to private foundations under IRC Section 4941 for which regulations have been issued. A correction under those rules generally requires that the transaction be undone to the fullest extent possible, and that the plan participants be restored to the position they would have been in had the prohibited transaction not occurred. Penalties typically apply to a prohibited transaction.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> The 408(b)(2) regulations provide a process for a responsible plan fiduciary to request a correction of a deficient disclosure and a process for notifying the DOL if those deficiencies are not timely corrected. The regulations also state that a plan fiduciary should, on discovery of a disclosure failure, make a determination as to whether to terminate or continue the arrangement. The plan fiduciary should take into account the adverse consequences of a termination on the plan’s participants as part of that determination.<br /> <br /> It is unclear at this point as to how much, if any, of the fees received by the service provider would need to be refunded to restore the participants’ accounts when the disclosures are not provided. Where payments are accelerated in the early months of the contract, it is likely that some repayment of that amount would be required if the contract is terminated. A refund of fees paid also may be required to correct the failure if the disclosure failure related directly to undisclosed fees.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 4975.<br /> <br /> </div>

<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><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. Labor Reg. § 2550.408b-2(c)(1)(viii).<br /> <br /> </div>

<div class="Section1"><br /> <br /> A covered service provider is a service provider that enters into a contract or arrangement with a covered plan, and reasonably expects to receive $1,000 or more from the plan in either direct or indirect compensation for covered services.<br /> <br /> For the purposes of the 408(b)(2) regulations, covered services include fiduciary services provided to the plan, fiduciary services provided to the investments held by the plan, services of registered investment advisors (“RIAs”), accounting, certain third party administrative services, record keeping services, brokerage services, and basically any service for which the service provider receives indirect compensation from a plan.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   Labor Reg. § 2550.408b-2(c)(1)(iii).<br /> <br /> </div>

<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><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 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>&nbsp;<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’s control, in which case the information must be provided as soon as practicable.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. Labor Reg. § 2550.408b-2(c)(1)(v)(B).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. Labor Reg. § 2550.408b-2(c)(1)(v)(A).<br /> <br /> </div>