***
New DOL regs require
more fee disclosure from retirement plan providers
Barbara Josefowicz, New York
The U.S. Department of Labor has released interim final regulations
that require new fee disclosures from retirement plan providers. The
fee disclosure requirements apply to qualified plans such as 401(k)
plans, 403(b) plans subject to ERISA and nonqualified plans such as
IRAs, SIMPLE IRAs and SEPs. Governmental plans not subject to ERISA,
non-electing church plans, foreign plans and unfunded excess benefit
plans are not covered by the regulations.
The new disclosures are required from any “covered service
provider,” which is defined as a service provider that enters into a
contract or arrangement with a covered plan and reasonably expects
to receive $1,000 or more in direct or indirect compensation in
connection with providing one or more of the following three
categories of specified services:
-
ERISA fiduciary or investment adviser
services
-
Recordkeeping services or brokerage
services to an individual account plan
-
Services generating indirect compensation
or payments from related parties
A “covered service provider” remains a “covered service provider”
even if some or all of the services provided pursuant to the
contract or arrangement are performed by its affiliates or by
subcontractors.
ERISA fiduciary or investment adviser services
ERISA fiduciary or investment adviser services include:
-
ERISA fiduciaries providing services
directly to the covered plan;
-
ERISA fiduciaries providing services in
connection with an investment contract, product or entity that
holds plan assets and in which the covered plan has a direct
equity investment; and
-
investment advisers providing services
directly to the covered plan.
Recordkeeping services or brokerage services to an
individual account plan
Recordkeeping services or brokerage services are subject to the
rules if provided to a covered plan that is an individual account
plan and that permits participants and beneficiaries to direct the
investment of their accounts if one or more designated investment
alternatives will be made available in connection with such
recordkeeping or brokerage services.
This category also includes service providers who provide
recordkeeping or brokerage services that include designated
investment alternatives selected independently by the plan fiduciary
and that are later added to the covered plan’s platform.
Services generating indirect compensation or payments from
related parties
Services generating indirect compensation or payments from related
parties include accounting, auditing, actuarial, appraisal, banking,
consulting (related to the development or implementation of
investment policies or objectives or the selection or monitoring of
service providers or plan investments), custodial, insurance,
investment advisory, legal, recordkeeping, securities or other
investment brokerage, third-party administration or valuation
services provided to the covered plan.
Impact
A covered service provider must disclose in writing descriptions of
the following:
-
the services to be provided;
-
the direct or indirect compensation
reasonably expected to be received;
-
the compensation paid to the covered
service provider, an affiliate or a subcontractor;
-
compensation to be paid upon termination of
the contract;
-
all direct and indirect compensation in
connection with recordkeeping services;
-
the form of payment; and
-
certain additional information for certain
services.
Although the required disclosures include some information already
provided for Schedule C of Form 5500, Schedule C is broader.
Schedule C covers service providers that are not “covered service
providers” subject to the new fee disclosure regulation. Schedule C
also applies to service providers to pension and welfare plans. The
fee disclosure regulation applies only to service providers to
pension plans.
Covered service providers under the new regulations must supply the
required fee information or risk losing the ERISA Section 408(b)(2)
exemption from the prohibited transition rules. ERISA Section
408(b)(2) generally provides a prohibited transaction exemption for
service contracts or arrangements between a plan and a party in
interest if the contract or arrangement is reasonable, the services
are necessary for the establishment or operation of the plan, and no
more than reasonable compensation is paid for the services.
In order for the service contracts or service arrangements to be
reasonable, the covered service provider must disclose specified
information to a responsible plan fiduciary. A responsible plan
fiduciary is a fiduciary with authority to cause the plan to enter
into, or extend or renew, a contract or arrangement for the
provision of services to the plan. Loss of the ERISA Section
408(b)(2) exemption would subject the covered service providers to
penalties for engaging in a prohibited transaction under Internal
Revenue Code Section 4975.
The new fee disclosure regulation becomes effective July 16, 2011.
It applies to contracts entered into before, on or after that date.
This means that covered service providers of existing arrangements
must provide the required disclosures no later than July 16, 2011.
Back to contents
Financial reform bill delivers big impact to
compensation practices
Jim Gandurski, Chicago
President Obama has signed into
law a sweeping financial reform bill that has major implications for
compensation plan design and governance at all public companies.
Much of the attention for the Wall
Street Reform and Consumer Protection Act of 2009 (H.R. 4173) has
centered on new “say-on-pay” requirements (read our deep dive into
these rules in our
June 2010 Bulletin), but there are several other aspects of the
legislation that will be important to compensation consultants and
practitioners.
1. Say-on-Pay —
This provision gives shareholders a non-binding vote on executive
pay levels and design. The bill also requires that companies include
a separate resolution related to the frequency of the vote. In other
words, shareholders will be asked to determine whether the vote
takes place every year or less frequently, such as every two or
three years. In addition, companies undergoing a merger or
acquisition will be required to provide a non-binding shareholder
vote that clearly outlines how any golden parachute agreements or
arrangements would be impacted by the event.
These “say-on-pay” votes must be
implemented at the first shareholder meeting that occurs six months
after the legislation is adopted. Thus, they will be on the ballot
for the 2011 proxy season.
2. Compensation committee
and advisor independence
—
All members of the compensation committee will be
required to be independent according to the standards for listing on
an exchange. Additionally, the compensation committee must have the
authority to engage compensation consultants and other advisors that
meet independence standards.
3. Clawback policies
—
The bill requires that companies include
compensation recovery (or “clawback”) policies that allow companies
to recover incentive-based compensation if it was earned based on
inaccurate financial statements that require a restatement by the
company. The policy contains a three-year look-back period for
compensation paid prior to the restatement and would also cover any
stock options granted. Further, all public companies will be
required to provide disclosure of their compensation recovery policy
in publicly filed proxy statements. The rules will apply to both
current and former executives.
4. Enhanced disclosures
—
The SEC will be required to amend disclosure
rules that require companies to include a comparison of executive
compensation levels and stock price performance over a five-year
period in order to demonstrate the link (or lack thereof) of pay and
performance.
5. Internal pay ratio
—
The SEC will be required to amend disclosure
rules requiring companies to include a comparison of the total
annual compensation for the CEO and the median annual total
compensation for all other employees. The intent of the disclosure
will be to illustrate the ratio of employee pay to CEO pay.
These reforms will undoubtedly
complicate the lives of compensation professionals in all public
companies. Companies should begin planning now for the new
landscape. Businesses also need to remain aware that instructions in
the legislation for governing bodies such as the SEC and the
Government Accountability Office could lead to future legislation.
Back to contents
This document was written to support the promotion
or marketing of professional services by Grant Thornton LLP, and is not written
tax advice directed at the particular facts and circumstances of any person.
Persons interested in the subject matter of this promotion or marketing document
are encouraged to contact Grant Thornton to discuss the potential application of
the subject matter herein to their particular facts and circumstances or seek
advice from an independent tax advisor. Nothing herein shall be construed as
imposing a limitation on any person from disclosing the tax treatment or tax
structure of any matter addressed herein. To the extent this document may be
considered to contain written tax advice, in accordance with applicable
professional regulations, please understand that, unless expressly stated
otherwise, any written advice contained in, forwarded with, or attached to this
document is not intended or written by Grant Thornton LLP to be used, and cannot
be used, by any person for the purpose of avoiding any penalties that may be
imposed under the Internal Revenue Code.
The information contained herein is general
in nature and is based on authorities that are subject to change. It is not, and
should not be construed as, accounting, legal or tax advice or opinion provided
by Grant Thornton LLP to the reader. This material may not be applicable to, or
suitable for, specific circumstances or needs, and may require consideration of
non-tax factors and tax factors not described herein. Contact Grant Thornton LLP
or other tax professionals prior to taking any action based upon this
information. Changes in tax laws or other factors could affect, on a prospective
or retroactive basis, the information contained herein; Grant Thornton LLP
assumes no obligation to inform the reader of any such changes. All references
to Section, Sec., or § refer to the Internal Revenue Code of 1986, as
amended.
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