Benefits Biz Blog
July 2008 Archives
DOL's New Thinking on Schedule C
Written by: Nick Curabba
Kudos to fellow blogger (and lawyer) Andrew Oringer who, writing for BNA's Pension and Benefits Blog on the new Department of Labor FAQs on Schedule C of the 5500, we think correctly highlighted one of the more important clarifications contained in the DOL's guidance. Q&A7 of the FAQs, which the DOL issued on June 14 after nearly six months of plan provider and sponsor questions, creates a huge exception to the new reporting rules for operating companies and puts to rest the concern of many that venture company operating companies and real estate operating companies would need to be included in the list of service providers on Form 5500 of benefit plan investors.
In Q&A7, the DOL clarified (helpfully, no doubt, to some) that the Schedule C reporting rules will not require reporting of indirect compensation received indirectly by a VCOC or a REOC for managing the operating company into which plans have invested. And while one may agree with the result (especially if you are, or represent, VCOCs or REOCs), it is difficult to discern an underlying policy driving the DOL's position. Indeed, Mr. Orlinger points out, correctly we think, that Q&A7 requires a kind of "intuitive analysis" under which "all that matters here is whether there is an operating company present effectively to block" the application of reporting rules. This would not only be the case in situations in which the operating company is not a VCOC or REOC (both of which are deemed to hold no "plan assets" under the DOL regulations), but even where the operating company was 100 percent owned by a plan (and therefore deemed to have "plan assets" for its underlying assets).
Likewise, with Q&A5, which creates a special rule for open brokerage windows. Again, there is much to like about a rule that does not require Schedule C reporting of compensation and plan relationships with the issuers of the individual stocks purchased through the brokerage window, but the Department offers no explanation or rationale for creating this exception. While we may agree that the administrative burden to apply the full measure of the rules to open brokerage windows might have caused sponsors to take away that investment option, the same could have been (and usually is) argued on behalf of every sector of the financial services/investment provider industry that must now engage in more extensive reporting.
In Q&A4, the Department grants another exception to reporting "ordinary operating expenses" charged against the plan's investment in an investment fund. Although "ordinary operating expenses" is not defined, the DOL notes, by way of example, that they include "attorney's fees, accountants' fees, (and) printers' fees" as among those expenses not reportable as indirect compensation on Schedule C. Again, it is not at all clear to us the boundaries of this "operating expenses" exception. If, as the DOL earlier notes in Q&A4, "fees related to the administration of the employee benefit plan such as recordkeeping services, Form 5500 filing and other compliance services" are reportable as indirect compensation, why are "ordinary operating expenses" excluded?. Is there a meaningful distinction between "fees related to the administration" of a plan and the "ordinary operating expenses" of the investment fund providing services to a plan? Moreover, to the extent many plans use attorneys and accountants to file Form 5500s and other compliance services, how can attorneys fees and accountants fees be excluded from reporting? Also, if printers' fees need not be reported, why would the Department create a special reporting code (as we blogged about already) for plans to track and report "copying and duplicating" fees?
We suspect there are many other questions raised by the FAQs, and other questions about the Form 5500 yet to be asked to the DOL. The 2009 reporting year is shaping up to be an interesting and active year.
Clarifying 'Information Sharing Agreements'
Written by Bob Toth
The new 403(b) regulations introduced a new term of art into the industry, the "Information Sharing Agreement." Conversations that I have had with a number of consultants, attorneys and IRS officials reveal that this is a term which is still seeking a meaning, and which is causing a bit of confusion in the marketplace. I thought I would try to bring some clarity to the term "ISA" (or perhaps, add to the confusion). Here's what I think we've got:
1. The Information Sharing Agreement. Before a plan participant will be allowed to exchange one annuity contract for another within the same plan, Section 1.403b-10(b)(2)(C)(1) of the regulations requires that the parties to the exchange and the employer enter into a written information sharing agreement committing the parties to exchange certain information about, for example, the participant’s employment status, and whether any plan loans may have been made. The exchange is required even if the vendor is no longer taking contributions under the plan. This seems to me to be the "purest form" of ISA, because it is directly discussed in the regulations. However, because the exchange may also be between parties who presumptively have agreed to otherwise exchange data on an ongoing basis for plan administrative purposes, the agreement may be actually "rolled up" into an overall "service agreement" and may never appear as a separate agreement.
2. The Service Agreement as an ISA. Nowhere in the new regs is it required that an information sharing agreement be in place as a precondition to anything other than an intra-plan contract exchange. The lack of an information sharing agreement to cover ongoing compliance matters will not be fatal to the plan. Now, as a practical matter, employers and vendors will all want a written service agreement that outlines which party will be responsible for what compliance activity. Even though drafters of this "service agreement ISA,” as I’ll call them, will likely use the “pure" ISA noted above as a model, this is really more of an ISA-plus kind of arrangement that will cover a lot more than the minimum required by the regs. Because of that, you should exercise caution when looking to sign these.
3. The Plan-to-Plan Transfer Information Exchange. There are six specific requirements to permit a "plan-to-plan" transfer outside of a plan, and none of those are a specific requirement of an information sharing agreement. However, as one revenue agent pointed out to me, you can't really do a plan-to-plan transfer as a practical matter without transferring data. Since termination of employment is not required for a plan-to-plan transfer, there can still be an ongoing need to check back with the original employer for things like employment status. So, according to the agent, there really can't be a valid plan-to-plan transfer without its own form of ISA.
It all may get worse before it gets better. The problem is that there is a practical and meaningful difference between each one of these different kinds of information sharing agreements, and the terms to which employers and vendors are (or are not) committing. Read them carefully, and understand just what it is you are required, and not required, to do.
Annuitization Publication
We have mentioned the use of annuities a few times on this blog, and we recently published an article with CCH which explained how the Qualified Plan Distributed Annuity (the "QPDA") solves the portability problem related to distributing annuities from defined contribution plans.
QPDAs are only a piece of the story. Annuitizing from DC plans also involves accumulating income guarantees within an ongoing plan. Bob Kistler, Nick Curabba, and I have just published another article (this time with BNA) which provides a general technical overview on the nuts and bolts of annuitizing from defined contribution plans. It is only an overview (since a complete technical analysis on each of the issues may actually be able to fill a book), but we hope you find it useful and would appreciate your comments.
Investment Advice Arrangements Meet Plaintiffs' Lawyers
Written by: Nick Curabba
With so much attention being paid these days to the Department of Labor's fee disclosure initiative, it may be easy to overlook another significant piece of guidance the current Administration is attempting to finalize this year. New regulations and a class exemption for the provision of investment advice to participants of individual account plans are currently under review by the Office of Management and Budget, and are expected to be issued in proposed form before the end of the summer. While it is too early to know precisely what the rule and exemption will say, it is a fair bet that many investment advisers, financial consultants, and plan sponsors will be paying attention.
The regulatory guidance comes as a result of Congress enacting, as part of the Pension Protection Act of 2006, a specific provision enabling plan sponsors to provide 401(k) plan participants with access to professional investment advisers. Before enactment of the PPA's advice provisions, parties operated in a somewhat muddled environment of informal DOL guidance, which essentially was comprised of a few advisory opinions outlining some acceptable forms of providing advice without running afoul of ERISA's prohibited transactions rules. Since the consequence of deviating from the Department's position could have been harsh (e.g. assessment of fines and penalty taxes), however, few plan sponsors ventured to provide advice to their participants.
The PPA cleared away some of the ambiguity surrounding the provision of advice, but frankly, may have created additional confusion. For instance, we know now that a plan sponsor can install an "eligible investment advice arrangement" for the benefit of the plan's participants. We also know that to be an EIAA, both the plan fiduciary and the investment adviser must meet a series of conditions. And we also know that the Department believes that advice can still be provided to plan participants under any of the models used prior to the enactment of the PPA.
What we don't know yet, and what the Department will hopefully answer in its guidance, is how a plan fiduciary can be sure it is adhering to the conditions for relief set out in the PPA. For example, one of the ways the PPA permits advice to be given is if it is provided via an independently audited computer model. Still unknown is the extent and method of an acceptable audit. In addition, we do not know whether the Department will find a computer model that can be adequately used to provide advice to individual retirement account holders.
Plan sponsors, too, will need to take a very close look at the advice regulations. Since any EIAA must be authorized by a plan fiduciary (other than the fiduciary adviser), there will be the usual fiduciary obligation to prudently select and monitor the adviser. Although plan sponsors will be off the hook for the result of any specific advice given and followed, they will have to be aware of the performance of the fiduciary adviser and be ready to remove the adviser if appropriate. They will also need to particularly mindful of the revenue sharing that is paid on the assets for which the advice is given.
Why does this matter? We think these new rules could open up a new avenue of litigation against plan sponsors and advisers. Although the Department of Labor and the ERISA plaintiffs' bar have been relatively inactive in the past in bringing suits based on investment advice, the new rules about to be proposed will undoubtedly create myriad traps for unwary sponsors and advisers. Careful analysis and planning will be required to avoid converting the best intentions of employers into another potential vehicle for ERISA litigation.
