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A Better Partnership


Jun 2012
June 05, 2012

Service Provider Fee Disclosures – Are You Ready?

The compliance date for the final service provider fee disclosure regulations under ERISA Section 408(b)(2) is July 1, 2012, for both existing and new service arrangements.  Under these regulations, registered investment advisers (RIAs) and broker dealers (BDs) must disclose certain information to the responsible plan fiduciary, including services provided to the covered plan, fiduciary status, and direct and indirect compensation.  For existing arrangements, this information must be provided no later than July 1, 2012.  For new arrangements (and for any contract renewals and extensions) entered into on or after July 1, 2012, the disclosure must be provided reasonably in advance of entering into, renewing or extending the arrangement.

Reason for new disclosure requirements

Under ERISA’s prohibited transaction rules, the furnishing of services between a plan and a party-in-interest (which includes any service provider, including RIAs and BDs) is strictly prohibited.  ERISA Section 408(b)(2), however, contains an exemption from this rule that allows for the use of plan assets to pay for plan services, but only if the contract and fees for those services are reasonable.  (NOTE:  if fees are paid entirely by the plan sponsor (no revenue sharing), then the service provider is not covered by this rule.)

Under the final regulations, an arrangement with a service provider is reasonable only if the required disclosure requirements are met.  After July 1, 2012, an arrangement will not be considered reasonable if the service provider has not provided the required disclosures.

Covered plans

Covered plans include 401(k) plans, profit sharing plans, money purchase pension plans, defined benefit pension plans (including cash balance plans), ESOPs and 403(b) plans subject to ERISA (but excluding annuity contracts or custodial accounts if frozen before January 1, 2009).

Covered service providers

Covered service provider (CSP) is defined in the final regulations as a service provider that enters into an arrangement with a covered plan AND reasonably expects to receive at least $1,000 in fees, regardless of whether the fees are expected to be received in a particular year or during the stated term of the arrangement.  In determining whether the $1,000 threshold has been met, both direct and indirect compensation (including non-monetary gifts and entertainment from financial institutions or other parties of more than $250) is counted.

CSPs include (1) certain fiduciaries and RIAs, (2) record keepers (RKs) or BDs who are platform providers of participant-directed defined contribution plans, and (3) service providers who receive indirect compensation in connection with services to the plan.

In the case of bundled arrangements, the service provider entering into the contract with the plan is the CSP, unless the service providers agree otherwise.

Required disclosures

The information that must be disclosed varies by category of CSP.  The following table summarizes the disclosure requirements for each category of CSP:

Required Disclosure Fiduciaries
and RIAs
RK or BD
Service Providers
Receiving Indirect
Description of services Yes Yes Yes
Fiduciary status statement, if a fiduciary Yes N/A
Status as an RIA, if applicable Yes N/A Yes
Direct compensation paid from plan Yes Yes Yes
Indirect compensation received from third party source (i.e., other than plan, plan sponsor, CSP and its affiliates and subcontractors) Yes Yes Yes
Compensation paid among related parties if set on a transaction basis (i.e., commissions, soft dollars, finder’s fees) or charged directly against the plan’s investments (i.e., 12b 1) fees Yes Yes Yes
Compensation for termination of arrangement Yes Yes Yes
Estimated cost of record-keeping services (where provided without explicit fee or when offset/rebated based on other compensation) N/A Yes N/A
Investment disclosure for designated investment alternatives offered under plan N/A Yes N/A

Consequences of not providing timely disclosures

If there is a failure to comply with the provider disclosure requirements, both the CSP and responsible plan fiduciary are automatically considered to have engaged in a prohibited transaction.  Upon the occurrence of a prohibited transaction, a 15% excise tax applies (and all fees received by the CSP may have to be refunded to the plan).  The excise tax is payable by either the CSP or the responsible plan fiduciary.  But, the final regulations contain a class exemption from the excise tax for “innocent” plan fiduciaries.  There is no parallel exemption for CSPs.

Steps that RIAs and BDs should take right now

1. Identify affected accounts.
2. Determine identity of responsible plan fiduciary to ensure delivery to appropriate person.
  The easiest way to find out who is the right person is to ask the client.  
  As part of the due diligence process, the RIA and/or BD might want to have the responsible plan fiduciary sign a form acknowledging his fiduciary status.  
4. Determine where and how to obtain disclosure data.  
  Contact third-party providers.  
  The required investment disclosures required from RK and BD platform providers might be able to be satisfied by passing through disclosure materials from the issuer of the designated investment alternative.  
5. Develop approach for meeting compliance deadline.  
  For existing clients, RIA and/or BD can either provide a written disclosure notice or enter into a new service agreement that includes all required disclosures.  
  For new clients, RIA and/or BD should consider including the required disclosures in the service agreement.  
6. Establish procedures for communicating any changes to disclosures – an amended Form ADV may be sufficient.  
7. Reconcile services provided with errors and omissions coverage.  

If you have any questions about the service provider fee disclosure regulations or need help with compliance, please contact Lisa Zimmer ( or 248.784.5191) or any other member of the Broker-Dealer/Investment Adviser Law and Regulation Group at the law firm of Warner Norcross & Judd LLP.

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