At the LABC, I participated on a panel that discussed current and upcoming requirements for the disclosure and reporting of fees, expenses and revenue sharing.

It is clear that, by the end of this year, plan expenses and revenue sharing will be on everybody’s radar screen and the requirements for reporting and disclosure will be much greater than they are today. That is because of the recent rash of lawsuits against plan sponsors and providers and because of two or three pieces of guidance that the Department of Labor will issue this year.

The three guidance projects are:

  • reporting of fees, expenses and revenue sharing on the Schedule C to the 2008 Form 5500;
  • the issuance of a model notice under the fiduciary adviser provisions in the PPA; and
  • the 408(b)(2) point-of-sale disclosure regulation.

Of the three, the 408(b)(2) regulation will have the greatest impact. Let me give you some background.

Under 408(b)(2), a plan can only pay its providers, including advisers, “reasonable compensation.” That should not be a surprise. . . . we have heard about the reasonable compensation requirement repeatedly in recent years. However, there has been little focus on the fact that 408(b)(2) also says that plans cannot enter into agreements or relationships with providers or advisers unless it is a “reasonable arrangement.” There is almost no information about the definition of a reasonable arrangement. (One existing piece of guidance is a regulation that says that it is a prohibited transaction for a provider to charge a penalty to a plan.)

In the 408(b)(2) project, it is contemplated that the DOL will define the meaning of “reasonable arrangement” to require full disclosure by providers and advisers of all fees, expenses and revenue sharing. That would likely include 12b-1 fees, finder’s fees, bonus arrangements, subtransfer agency fees, commissions, and other things of value, such as trips, vacations, gifts, and so on. It would include all payments of those types, both direct and indirect. We understand that it will also include payments to affiliates of advisers and providers.

Because of the growing awareness of this project, and because of the belief that the regulatory requirements will be meaningful, many providers are already gearing up to report that information at point of sale. Advisers will also need to report all of their revenues for themselves and revenues received by their affiliates.

As a starting point, we recommend that plans sponsors work with their advisers and providers to gain an understanding of the different types of money flows, who that money is paid to, and how the money benefits their plan.

Disclaimer Required by IRS Rules of Practice:
Any discussion of tax matters contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding any penalties that may be imposed under Federal tax laws.

Source: LABC Bulletin