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News from NIPA.org, August 24, 2011
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Implementing Retirement Plan Disclosures: 5 Things TPAs Should Know

By now, most TPAs are aware that the U.S. Department of Labor (DOL) has adopted significant new rules governing disclosures in connection with ERISA-covered pension and retirement plans. This article highlights five things for TPAs to keep in mind when considering how these new requirements will affect services provided to plan clients. 

Background. New regulations, released in July 2010, will require "covered service providers" to disclose certain information about how they are paid for plan services. A key new requirement is disclosure of "Indirect Compensation," meaning compensation received from a source other than the plan itself or the plan sponsor, such as insurance commissions, 12b-1 fees or other fees from mutual funds, referral and finder’s fees, overrides or revenue sharing, and also meals and other gratuities exceeding de minimis thresholds. The goal is that an employer/sponsor (or other fiduciary) who selects a plan's service arrangements will have enough information to evaluate whether services and fees are reasonable. The regulations were issued in "interim final" form; final regulations are expected to be adopted in fall 2011.

New regulations mandating disclosures to participants of participant-directed 401(k) and similar plans, include (among other things) new standards for disclosing plan administrative and other expenses and information about each of the plan's designated investment alternatives. Performance and expense information for investment alternatives must be shown in a comparative format, and supplemental information about investment alternatives must be available on an internet Web site. The goal is to ensure that participants who direct investments in their plan accounts will have sufficient information to make informed investment decisions. In comparison to the existing participant disclosure rules under ERISA section 404(c), the new participant disclosure rules are mandatory rather than voluntary.

The DOL recently extended implementation dates for both regulations. Covered service providers must begin complying with the new regulations by April 1, 2012.  Disclosures must be delivered to participants beginning May 31, 2012.

1. Are TPAs "covered service providers?"

A service provider is "covered" if it (together with affiliates and subcontractors) expects to receive $1000 or more as compensation for services over the life of the engagement and provides (one or more of)
  • certain "key" services, e.g., third party administration, accounting, or actuarial, if the service provider receives Indirect Compensation;
  • services in a fiduciary capacity or as a registered investment adviser (with the SEC or any state); or
  • record keeping or brokerage services to a participant-directed plan, if one or more of the plan's "designated investment alternatives" are available with the services.
Most TPAs are covered service providers as they receive Indirect Compensation, in the form of revenue sharing, trips, conferences, awards, or referral fees from insurance providers or record keeping platforms, in connection with third party administration services. A TPA that is registered as an investment adviser, or provides services in another fiduciary capacity, generally would be a covered service provider (even if not receiving any Indirect Compensation). But a TPA that only provides plan design, testing and other compliance services for fees paid solely from plan assets or by the plan's sponsor and does not receive any Indirect Compensation or does not provide fiduciary services or participant-level record keeping likely will not be covered.

TPAs that are covered service providers should implement procedures for complying with their disclosure obligations, including ongoing procedures for updating disclosure when there are changes, providing disclosure at contract renewals and extensions, and responding to sponsor requests for information.  A TPA who is not a covered service provider should consider similar procedures as a customer service matter, and to ensure compliance in the event that it later should become covered.

2. Participant disclosure is the "plan administrator's" responsibility.

While covered service providers are directly responsible under service provider disclosure rules, the duty to comply with the new participant disclosure rules belongs to each plan's "administrator" who is, typically, the plan's sponsor or a fiduciary committee named in plan documentation. As a practical matter, plan clients will expect TPAs to assist with these disclosures.

The service provider disclosure regulations will require covered service providers to provide information requested by a plan administrator to comply with ERISA requirements, including the participant disclosure rules. Many plan record keepers and investment providers are already preparing new participant disclosure materials to assist plan administrators to comply. But these new materials may not be customized for individual plans, and TPAs can add value by reviewing whether materials prepared by other service providers meet individual plan requirements.  TPAs should also be prepared to assist clients with plans that are not invested on an insurance or record keeping platform with these disclosures, such as balance forward plans. 

3. There are some key differences between new service provider disclosure requirements and the participant disclosure rules.

Although some information that is disclosed under the service provider disclosure rules also must be provided to plan participants, it is important to recognize that the two rules have different goals and their requirements must be independently reviewed.

One example is that the service provider disclosure rules allow substantial flexibility to describe service provider compensation and services, so long as the employer/sponsor has sufficient information to evaluate the reasonableness of these arrangements. The participant disclosure regulations are less flexible, and include specific requirements for calculating and presenting investment expense and performance information based, in general, on rules that apply to mutual funds.  Because information previously provided to participants may need substantial revisions, plans offering investments other than mutual funds are likely to find complying with the new rules time consuming and costly.

Another noteworthy difference is that participant disclosures are governed by DOL's electronic disclosure rules, which establish conditions for using email and other electronic media for delivering information to participants. In comparison, service providers have more flexibility to use electronic media for disclosure to employers/sponsors, depending on their contractual agreements.

4. Consequences for not complying with the new rules could be onerous.

The DOL issued the new service provider disclosure regulations under ERISA section 408(b)(2), which is an exemption from ERISA's prohibited transaction rules for "reasonable service arrangements." If a covered service provider does not comply, the service arrangement may be a prohibited transaction, and the covered service provider could be required to "correct" the transaction, including possibly repaying some or all of its compensation, and also could be liable for excise taxes under section 4975 of the Internal Revenue Code.

The new participant disclosure rules make disclosure to a plan's participants a fiduciary duty under ERISA. A plan administrator who does not provide the required information would be in breach of its fiduciary duties under ERISA and liable for participant investment losses caused by the breach.

5. Expect that rules addressing disclosure requirements will continue to evolve. 

These two new regulations are only a part of evolving disclosure standards. The DOL proposed, in November 2010, amendments to the participant disclosure rules that would establish specific requirements for target date funds. The DOL is also working on rules that will provide standards for participant benefit statements. And, other regulators are engaged in rule making that could affect disclosure obligations of TPAs and other plan service providers. For example, in August 2010, the SEC issued a rule proposal in connection with 12b-1 fees.

Roberta J. Ufford, Principal, Groom Law Group
Russ Dempsey, VP & Chief Legal Officer, United Retirement Plan Consultants


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