This is the eighth in a series of Technical Updates relating to the DOL’s July 2010 service provider fee disclosure regulations. Parts IV through VII discussed the disclosure requirements which generally apply (“the initial disclosures"). This Technical Update explains the timing requirements for the initial disclosures, reporting changes, and requests for reporting and disclosure information.
Q-1: When must a covered service provider (CSP) provide the initial disclosures to the responsible plan fiduciary in order to satisfy the regulations?
With regard to existing contracts, a CSP must provide the initial disclosures no later than July 16, 2011.
For contracts or arrangements entered into, extended, or renewed after July 16, 2011, the CSP must provide the initial disclosures reasonably in advance of the date the CSP and the plan enter into, extend or renew the contract. The DOL considered, and decided not to adopt, a specific timeframe for the disclosures, believing that the parties to the contract are in the best position to determine what is reasonable. Ultimately, of course, the responsible plan fiduciary must have enough information to discharge its ERISA obligation to use plan assets only to pay “reasonable" administrative expenses. Q&As-2 and -3 discuss two exceptions to the general rule explained here.
Notice that there is no annual disclosure requirement. For example, if a CSP enters into a 5-year contract with the plan, then the CSP makes the initial disclosures before entering into the agreement and need not make them again unless and until the contract is extended or renewed.
Q-2: When must a CSP provide the initial disclosures if an investment vehicle originally determined not to hold plan assets subsequently is determined to hold plan assets?
When an investment vehicle is determined not to hold plan assets at the time of the plan’s direct equity investment, but subsequently is determined to hold plan assets (while the plan’s investment continues), the CSP must make the initial disclosures as soon as practicable, but not later than 30 days from the date the CSP knows that the investment vehicle holds plan assets.
Example. Assume Bank B is the trustee for plan X. B makes the required disclosures prior to renewal of its contract with the plan that is effective September 1, 2011. Plan X has invested in a limited partnership. At the time of the investment, retirement plan investors hold only 15% of the value of the limited partnership, so that the regulations do not treat the limited partnership as holding plan assets. On January 1, 2012, as a result of new plan investors in the limited partnership, plan investors own 30% of the limited partnership. As of January 1, 2012, the limited partnership is deemed to hold plan assets, and the limited partnership’s investment manager becomes a CSP with respect to plan X by reason of being a fiduciary to the limited partnership. The investment manager must complete the required disclosures not later than 30 days after knowing the limited partnership holds plan assets. Presumably, the investment manager knows this status as of January 1, 2012.
Q-3: When must a platform recordkeeper or broker make required disclosures regarding an investment alternative that is not designated at the time of the contract, but is designated at a later date?
Recall that a platform recordkeeper or broker must make specific additional disclosures regarding each designated investment alternative (see Part VII in this series of Technical Updates). If the responsible plan fiduciary adds an investment alternative that was not designated at the time the CSP and the plan entered into the contract, the recordkeeper/broker must make the required investment disclosures not later than the date the responsible plan fiduciary adds the investment alternative.
Example. Assume recordkeeper R provides recordkeeping services through a bundled service arrangement that includes making available to plan X participants through a platform 6 mutual funds offered by Best Mutual Funds. R has a contract with X and has made the required disclosures to X. On October 1, 2011, R and X, the plan trustee, agree to add Best’s New Shining Star Fund as an investment option. R must provide the responsible plan fiduciary with the required disclosures for the New Shining Star Fund by October 1, 2011.
Q-4: When must a CSP disclose a change to the information included in the initial disclosures?
A CSP must disclose any change in the information the regulations require the CSP to disclose as soon as practicable, but not later than 60 days from the date the CSP is informed of the change, unless circumstances beyond the CSP’s control preclude such disclosure. In that case, the CSP must disclose the information as soon as practicable. The “as soon as practical" deadline responds to concerns that the CSP and the responsible plan fiduciary might disagree when the 60-day period begins, or that the CSO might not have sufficient time to discover changes to information relative to all of its business units or affiliates. This provision requires disclosure of any change, as opposed to a material change. For example, a change in a designated investment alternative’s expense ratio a platform recordkeeper discloses must be reported promptly after the CSP learns of the change. Commentators have criticized this requirement as being excessively burdensome.
Q-5: Is a CSP subject to any additional requests for information from the responsible plan fiduciary or the plan administrator?
Yes. Upon request of either the responsible plan fiduciary or the plan administrator, the SCP must furnish any other information relating to the compensation received in connection with the contract that the plan official requires for the plan to comply with reporting and disclosure requirements under Title I of ERISA, and forms and schedules (including Form 5500) issued thereunder. A future Technical Update will discuss the relationship between the new regulatory fee disclosure requirements and the Form 5500 Schedule C reporting requirements.
The disclosure obligation is not limited to information specifically required to complete a Form 5500. For example, the DOL is widely expected to issue new regulations requiring plan fiduciaries to disclose investment and expense information to participants. A plan administrator could use this provision to compel the CSP to disclose the information needed to comply with these regulations once they are effective.
Q-6: When must a CSP provide any additional disclosures described in Q&A-5?
The CSP must make any additional disclosures not later than 30 days following receipt of a written request from the responsible plan fiduciary or plan administrator, unless extraordinary circumstances beyond the CSP’s control preclude the disclosure. In that case, the CSP must disclose the information as soon as practicable.
Again, this provision has come under criticism. It is uncertain how this requirement interfaces with the requirement that a CCT or PSA provide annual report information within 120 days after the end of the DFE’s fiscal year.
ERISA Workshop 2010 to Focus on New Service Provider Regulations
The focus of this year’s ERISA Workshop is indeed on ERISA, as the workshop will look in-depth at the new regulations mandating disclosure from service providers to plan administrators. We’ll show you how to know if you are subject to the new rules and what you must do to comply (and what happens if you don’t). We’ll also analyze the rules in terms of modern business practices and revenue models. Of course, this seminar will also keep you up-to-date on all other recent changes in tax rules, and important developments affecting qualified plans. With the new service provider regulations, this seminar is a “must attend" for all those servicing retirement plans. Registration is now open on our Web site.
Don’t miss our upcoming Web seminars on these timely topics:
EFAST2: Amendments, Late Filing, and Short Plan Years – An encore presentation, Thursday, October 7, 2:00 p.m. ET
Visit our Web site to learn more and to register.
To Roth or Not to Roth - An encore presentation, Wednesday, October 13, 2:00 p.m. ET
To register, go to our Web site.