On the surface, the new 408(b)(2) requirements appear to mirror the Schedule C reporting requirements for the DOL’s revised Form 5500, which was first effective for 2009 plan years.
Both 408(b)(2) and Schedule C disclosure requirements:
· Were designed to help the plan sponsor/fiduciary fulfill its fiduciary obligation to ensure that fees are reasonable
· Identify potential conflicts of interest
· Require disclosure of direct compensation and indirect compensation received by service providers
Upon closer inspection, there are major differences between 408(b)(2) and Schedule C disclosure requirements, including the scope of plans covered, fees covered by the disclosure, affected service providers, threshold amounts and consequences of non-compliance, as shown in the following chart.
Large and small retirement plans subject to ERISA1 *
Large plan filers, both retirement and health and welfare plans
Fees covered by disclosure
Covered service providers
ERISA fiduciary, registered investment advisor, recordkeeper or broker and certain other service providers that expect to receive indirect compensation
All persons who rendered services to the plan or had transactions with the plan during the 5500 reporting year if the person received (directly or indirectly) compensation over the reporting threshold
Minimum compensation threshold (combined for direct and indirect)
$1,000 or more for service providers
$5,000 or more for service providers
$25,000 or more for employees
De minimis exclusion for non-monetary compensation
$250 or less
Less than $50 and total from one source in a calendar year is less than $100
Consequences of non-compliance
Potential prohibited transaction4
Non-compliance reported on Schedule C5
* Refer to endnotes following article
Lessons Learned from the Schedule C Experience
The July 1, 2012, deadline is approaching quickly. Plan sponsors and plan professionals should draw upon their experiences with Schedule C and the “lessons learned” to assist with 408(b)(2) implementation.
Though the 408(b)(2) disclosure responsibilities largely rest with the covered service providers, it is important for plan sponsors and third-party administrators to help facilitate the disclosure process by:
· Proactively communicating expectations with covered service providers
· Establishing a timeline to implement initial and ongoing procedures
Monitoring and adjusting the timeline as necessary
Designating an individual to act as project manager; deciding who will review the disclosures for completeness and who will follow-up on missing information (consider using a checklist and document all attempts to obtain the required information)
Assigning tasks and following up with the responsible individuals
· Sending Informational Notices from the plan to covered service providers
· Educating plan trustees
Consider inviting the plan’s attorney, actuary or CPA to present a mini-seminar
· Utilizing the resources available to the plan, especially legal counsel
In our experience with Schedule C implementation, plan sponsors and administrators may have underestimated the time and resources required to effectively address the reporting requirements. This time around, plans should consider designating an individual who can manage the disclosure process. Plan sponsors should attend to the 408(b)(2) requirements immediately to comply with the July 1, 2012, deadline.
Need help or a seminar? Just ask … plans should consult with their professionals to design a timeline, create an Informational Notice or develop an action plan specific to their needs. Lindquist LLP’s professionals are ready to present informational seminars or to assist in any way we can.
Michelle L. McCann, CPA, is a partner in Lindquist LLP's San Ramon office. She is primarily responsible for overseeing quality control for preparation of exempt organization and employee benefit plan returns, including Forms 5500, 990, LM-2 and 199. Michelle also provides QuickBooks training and support for the firm's clients. Contact Michelle at firstname.lastname@example.org.
Richard Thiermann, CPA, is a partner in Lindquist LLP's Southern California office. Rich has 24 years of experience with audits of defined contribution, defined benefit, and health and welfare plans. His professional memberships include the Western Pension & Benefits Conference, International Foundation of Employee Benefit Plans, American Institute of Certified Public Accountants, California Society of Certified Public Accountants and California Society of Association Executives. Contact Rich at email@example.com.
Direct compensation includes payments made directly from the plan for services rendered to the plan or because of a person's position with the plan.
Indirect compensation is compensation received from sources other than directly from the plan or plan sponsor, including payments to persons or entities for investment management, recordkeeping, participant communication, and other services to the plan as part of a transaction with the plan. Indirect compensation also includes money or "anything else of value" received in connection with services rendered to the plan or in connection with the service provider's position with the plan.
1Includes pension plans (defined contribution and defined benefit) covered by ERISA §3(2)(A) (e.g., 401(k), profit sharing, money purchase, single employer or multiemployer defined benefit or ERISA-covered 403(b) Plans). Excludes SEPs, SIMPLE Plans, IRAs and owner-only “Keogh” plans.
2Prospective fees must be disclosed before a covered plan enters (or extends/renews) a contract with a covered service provider. The Final Rule is effective July 1, 2012; contracts or arrangements in existence prior to July 1, 2012, must be brought into compliance by the effective date.
3Retrospective fees are disclosed on Schedule C after payment is made to a service provider.
4In the event that a covered service provider fails to comply with the disclosure requirements, the service contract will not be deemed reasonable within the meaning of ERISA §408(b)(2), and the plan fiduciary would be liable for a prohibited transaction under ERISA §406. However, the DOL has incorporated a Class Exemption into the final regulations that would relieve a fiduciary (but not the service provider) of liability for a prohibited transaction resulting from a service provider's failure to comply with the disclosure requirements. The fiduciary would be required to take actions upon discovering the failure, including notifying the DOL.
5Service providers who refuse or fail to report are identified on Schedule C by name, EIN or address, nature of services, and description of information not provided.