Alert July 22, 2008

Department of Labor Explains Changes to ERISA Plan Annual Reporting Requirements Concerning Service Provider Compensation, and Grants Limited Transition Relief

The Department of Labor (“DOL”) issued a set of Questions and Answers (the “DOL Qs & As”) regarding the new requirements for reporting compensation paid to entities providing services (directly or indirectly) to employee benefit plans and certain investment funds that file Form 5500, Schedule C with the DOL.  These changes, which were discussed in the January 1, 2008 Alert, are effective for the Form 5500 to be filed by a plan for the plan’s fiscal year beginning in 2009.  The DOL Qs & As respond to a wide range of questions that have arisen with regard to these new reporting requirements, including the special rules for the reporting of “eligible indirect compensation” and other types of indirect compensation, reporting requirements that apply where the plan receives services under a “bundled services arrangement,” treatment of float income, situations where compensation disclosures by service providers can be made based on estimates or formulas, and rules for reporting gifts, meals, and entertainment.

Selected highlights of the DOL Qs & As are summarized briefly below:

  • The DOL Qs & As provide limited transition relief from the requirement that service providers that fail to provide a plan administrator with information necessary to complete Schedule C must be listed on the schedule.  Under this transition relief, a plan need not list a service provider who fails to provide needed information for the Form 5500 filed with regard to the plan year beginning in 2009, if the plan administrator receives a statement from the service provider that the service provider made a good faith effort to make necessary recordkeeping and information system changes in a timely fashion and, despite such efforts, was unable to complete the changes for the 2009 year.
  • While direct compensation paid by a plan must be reported based on the plan’s fiscal year, information regarding indirect compensation (including an estimate or the formula for determining such indirect compensation) may be reported based on the service provider’s fiscal year that ends within the plan’s year (as long as the same method is used consistently from year to year).
  • The indirect compensation that must generally be reported includes only compensation received in situations where the person’s eligibility for payment is based on services rendered to the plan or on a transaction with the plan.  Thus, indirect compensation includes, for example, asset-based management fees paid by an investment fund (such as a mutual fund) in which the plan invests, commissions or fees related to purchases and sales of interests in the fund, and fees for shareholder services or compensation received from an investment fund (or its agents) by an entity for plan recordkeeping or administrative services.  Indirect compensation would not include, for example, the investment fund’s ordinary operating expenses (e.g., accountants’ fees) or brokerage commissions for effecting securities transactions within the fund’s portfolio.
  • The general rule that compensation received under a bundled services arrangement need not be broken out and reported separately with regard to each entity providing services through the bundle does not apply where a “separate fee” is charged against the plan’s investment in a fund.  Examples of such a “separate fee” include a revenue sharing payment to a third party administrator that is charged against the plan’s investment in the fund as a separate amount or pursuant to a separate formula.  However, payment to the third party administrator by the fund’s investment manager, out of the overall investment management or shareholder services fees it receives from the fund, would not be a separate fee for this purpose. 
  • While the alternative (and less onerous) reporting rules regarding “eligible indirect compensation” require written disclosure to the plan administrator of specific information concerning that compensation (e.g., the purpose, amount (including estimate or formula), recipient, and payer of the compensation), this disclosure requirement may be satisfied using documents prepared and provided to the plan administrator for other purposes – e.g., a prospectus, brokerage fee schedule, or Form ADV.