By Darcy Norville
On January 1, 2012 [i] new rules go into effect that will require investment advisers, brokers and others who provide services to ERISA plans to disclose to plan fiduciaries information relating to the service provider's compensation. This disclosure is intended to help plan fiduciaries determine the reasonableness of a service provider's compensation, and whether conflicts of interest may affect a service provider's performance of services. Contracts and arrangements that were entered into prior to January 1, 2012 must comply with the new rules as of that date.
The rules apply to service providers who reasonably expect to receive $1,000 or more in direct or indirect compensation in connection with providing one or more of the services described below under a contract or arrangement with an employer pension plan (a defined contribution plan or a defined benefit plan). The rules do not apply to service providers to individual retirement accounts or health and welfare plans.
Services as a registered investment adviser or fiduciary – including services provided directly to the plan as a fiduciary; services provided directly to the plan as a registered investment adviser; and services provided as a fiduciary to an investment contract, product or entity (such as a private investment fund) that holds plan assets and in which the plan has a direct equity investment.
Brokerage or recordkeeping services – including services provided to a participantâdirected individual account plan, if one or more of the investment alternatives under the plan are made available in connection with the brokerage or recordkeeping services.
Other services for indirect compensation – including consulting related to investment policies; consulting related to selection of service providers or plan investments; investment advisory services; securities or other investment brokerage; third party administration; valuation services; and actuarial, appraisal, banking, accounting, custodial, insurance and auditing services. These services cause a service provider to be covered by the rules only where the service provider reasonably expects to receive "indirect" compensation or certain payments from affiliates or other related parties.
A covered service provider must disclose the following information, in writing, to a plan fiduciary that is responsible for entering into a contract or arrangement, reasonably in advance of the date that the contract or arrangement is entered into:
Services – A description of the services to be provided to the plan.
Status – If applicable, a statement that the service provider (or an affiliate or a subcontractor of the service provider) will provide the services as a fiduciary, and, if applicable, a statement that the service provider (or an affiliate or a subcontractor of the service provider) will provide the services as a registered investment adviser.
Compensation – A description of all of the following types of compensation:
Direct compensation (i.e., compensation received directly from the plan).
Indirect compensation (i.e., compensation received from any source other than the plan, the plan service provider, or an affiliate or subcontractor of the service provider).
Compensation paid among related parties. Separate disclosure is required if compensation paid among the service provider, its affiliates or subcontractors in connection with the contract or arrangement is (a) set on a transaction basis (such as commissions, soft dollars, finder's fees or other similar compensation based on business placed), or (b) charged directly against the plan's investments and reflected in the net value of the investments. The disclosure must identify the services for which the compensation is paid, each payer and recipient, and the status of each such payer and recipient as an affiliate or a subcontractor of the service provider.
Compensation for termination of the contract or arrangement (i.e., the expected termination fees and whether any prepaid fees will be refunded).
Manner of Receipt – A description of the manner in which the compensation will be received (i.e., whether the plan will be billed or the compensation will be deducted directly from the plan's investments).
Investment-Related Disclosure for Fiduciary Services – In the case of a fiduciary to an investment contract, product or entity that holds plan assets and in which the plan has a direct equity investment, a description of (a) any compensation that will be charged directly against the amount invested in connection with the purchase, sale, transfer of or withdrawal from the contract, product or entity (such as sales loads or redemption fees), (b) the annual operating expenses (i.e., expense ratio) if the return is not fixed, and (c) any other ongoing expenses (such as wrap fees).
Investment-Related Disclosure for Recordkeeping and Brokerage Services – In the case of a person providing recordkeeping or brokerage services in connection with a participantâdirected individual account plan, the disclosures described in the paragraph immediately above must be provided with respect to each plan investment alternative for which recordkeeping or brokerage services will be provided. If there is no explicit charge for providing recordkeeping services, a provider of such services must provide a reasonable good faith estimate of the cost to the plan of such recordkeeping services, including an explanation of the methodology used to determine the estimate.
The investment-related disclosures described in the preceding two paragraphs generally may be included in the offering documents related to each investment alternative, as long as the issuer of the investment alternative is not an affiliate of the person providing recordkeeping or brokerage services.
Service providers must provide the required disclosures to existing and new clients no later than January 1, 2012. The general fee disclosures included in an investment adviser's Form ADV generally will not satisfy this new ERISA disclosure requirement.
For more information regarding the ERISA plan service provider disclosure rules please contact Darcy Norville (firstname.lastname@example.org, 503-80-2036), or another member of the financial services practice group.
[i] The new rules originally were to go into effect July 16, 2011; on February 11, 2011 the Department of Labor announced a delay of the effective date of the new rules until January 1, 2012.