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
Platform
Providers |
Service Providers
Receiving Indirect
Compensation |
Description of services |
Yes |
Yes |
Yes |
Fiduciary status statement, if a fiduciary |
Yes |
N/A
(generally) |
Yes |
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 |
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.