Requirements for ERISA Advisers and Service Providers
December 18, 2018 | Last updated: February 25, 2020
By: Jeffrey Van Blarcom
Advisers and other service providers to most ERISA-covered plans must disclose their fees, following a U.S. Department of Labor (DOL) regulation that became effective July 1, 2012. These regulations are designed to dovetail with corresponding regulations that require plans to disclose service provider information to DOL in a timely manner. A service provider’s failure to comply with these disclosure requirements automatically labels the advisory contract or other service arrangement as a “prohibited transaction” and subjects the service provider to a punitive excise tax.
Advisers should review revised DOL Rule 408-b-2, which sets forth rules implementing the “prohibited transaction” exemption in Section 408(b)(2) of the Act for “services or office space.” Rule 408(b)(2)-(c) describes the conditions under which a “reasonable contract or arrangement” between an adviser and a covered plan will not be challenged as a “prohibited transaction.”
Highlights of the new regulations include the following:
Disclosure Statement. The Rule requires that the adviser provide to the Plan a series of disclosures about services and fees in a timely manner. The DOL did not specify a particular form of disclosure.
Services Covered. The new regulation is designed to be as comprehensive as possible to give plan sponsors a clear idea of the total range of services provided and fees charged by the adviser and its affiliates. It introduces the concept of a “Covered Service Provider,” which enters into a contract or arrangement with the covered plan and reasonably expects $1,000 or more in compensation, direct or indirect, to be received in connection with providing one or more services, regardless of whether these services will be performed, or compensation received, by the Covered Service Provider, an affiliate, or a subcontractor. These services may include:
Services as a fiduciary or registered investment adviser
Certain recordkeeping or brokerage services
Other services ” accounting, auditing, actuarial, banking, etc. ” for indirect compensation
Disclosure requirements. The Covered Service Provider must disclose the following information to a Responsible Plan Fiduciary in writing:
Compensation: direct compensation, indirect compensation, compensation paid among related parties, compensation for termination of contract or arrangement
Plan investment disclosure
Timing of initial disclosure requirements and changes. A Covered Service Provider must disclose the required information to the Responsible Plan Fiduciary reasonably in advance of the date the contract or arrangement is entered into, and extended or renewed.
Reporting and disclosure information and timing. Upon written request, the Covered Service Provider must furnish any other information relating to the compensation received in connection with the contract or arrangement that is required for the covered plan to comply with the reporting and disclosure requirements. The information must be disclosed reasonably in advance of the date that the Responsible Plan Fiduciary or covered plan administrator states that it must comply or as soon as practicable in extraordinary circumstances.
Disclosure errors. No contract or agreement will fail to be “reasonable” because the Covered Service Provider, acting in good faith, makes an error or omission in disclosing required information. The correct information must be disclosed no later than 30 days after the Covered Service Provider becomes aware of the error or omission.
Consequences of failure to disclose. If a Covered Service Provider fails to disclose the information required by the Rule, the contract or arrangement will not be ”’reasonable” unless the failure satisfies the Rule’s cure provision for inadvertent disclosure errors and omissions. The service contract or arrangement will not qualify for relief from ERISA’s prohibited transaction rules provided by Section 408(b)(2) of the Act. The resulting “prohibited transaction” will have consequences for both the Responsible Plan Fiduciary and the Covered Service Provider.
Required termination provisions in the contract or arrangement. The Rule states that no contract or arrangement is “reasonable” within the meaning of section 408(b)(2) of the Act and the Rule if it does not permit termination by the plan without penalty to the plan on “reasonably short notice” under circumstances that prevent the plan from becoming locked into an arrangement that has become disadvantageous.
Important questions to consider
For advisers and other service providers to ERISA plans, the advent of these regulations raises a variety of issues:
How are arrangements to be judged as “reasonable?”
What is an accepted form of disclosure?
What procedures should be adopted to make sure information is kept current?
What is the effect on affiliated entities participating in service to the covered plan?
What do these disclosures do to the provider’s relationship and communications with the plan sponsor?
For those whose business is reliant on services provided to ERISA plans, familiarity with the detail of these regulations is essential, as well as access to advice from knowledgeable experts on how the regulations are being applied and interpreted.
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