Blue Ridge ESOP Associates Industry News

ESOP & 401(k) Coordination Tips Post-Disclosure-Part 1

Posted by Tom Roback, Jr.

Jul 31, 2014 8:00:00 AM

After several postponements, 401(k) fee disclosure was mandated by the DOL (Department of Labor) before July 1st of 2012. So what kind of impact have we seen in the ESOP world? Has it been successful in helping plan sponsors and participants understand the costs of their 401(k) Plans?

408(b)(2) OverviewGavelandShakingHands

ERISA Section 408(b)(2) exempts professionals from prohibited transaction requirements if they have "reasonable" service agreements with Plan sponsors, and/or parties in interest. The regulations apply to fiduciaries, Third Party Administrators (TPAs like Blue Ridge ESOP Associates), and brokers receiving payments from the Plan, and any professional who will receive "indirect" compensation.

ERISA 408(b)(2) impacts a number of 401(k) plans and KSOPs for which TPAs provide third party administration services. This includes all plans for which the firm receives any form of indirect compensation (revenue sharing) from the Plan. That includes 401(k) Plans and KSOPs that receive daily recordkeeping services through various 401(k) recordkeeping platforms.  Most ESOP TPAs are not a "covered service providers" (CSPs) with respect to any standalone ESOP for which they provide services. The definition of "covered service provider" is explained below.

The 408(b)(2) disclosure rules apply to covered service providers (CSPs). There are 3 categories of CSPs. A CSP is one who enters into a contract or arrangement with a plan and who expects to receive at least $1,000 in compensation. That includes compensation received by the CSP, an affiliate or subcontractor. Category A: -A fiduciary service provider or registered investment advisor providing services directly to the plan. -A fiduciary providing services to an investment contract, product or entity that holds plan assets in which the covered plan has an equity interest. -Investment advice provided directly to the covered plan by a registered investment advisor under either the Investment Advisors Act of 1940 or State law. Category B: Recordkeepers or brokers providing services to participant-directed plans if one or more investment alternative is made available through an arrangement connected to the recordkeeper or broker. Category C: Services for indirect compensation. This includes accounting, appraisal, banking, legal, investment brokerage or TPA services IF the service provider reasonably expects to receive indirect compensation. With respect to the typical standalone ESOP, most TPAs are not in Category A because they are not acting as a custodian or a trustee in a fiduciary capacity. Category B would not apply to most ESOP TPAs because ESOPS are generally not participant-directed plans, and even if participant direction is offered, we are not operating in a situation in investment alternatives are made available in conjunction with our recordkeeping services. Category B is intended to cover record keepers and brokers who offer a platform of investment alternatives to participant-directed account plans. Category C should not apply either because ESOP TPAs are not typically receiving indirect compensation for services provided to any standalone ESOP. However, if they are receiving indirect compensation from the 401(k) portion of a KSOP, the TPA is a CSP and as such, will have to provide 408(b)(2) required disclosures. In short, for ESOP providers, the regulations will require that there be a specific written agreement outlining the scope of work, direct and indirect compensation, termination compensation, and manner of receipt. Investment entities, brokers, and their fiduciaries that hold plan assets (such as the investments from an ESOP non-stock account) must provide information on fees and expenses related to the investments.

Unfortunately, we haven’t seen much evidence that all of this effort has been useful yet. It’s still relatively early, but most plan sponsors have barely glanced at these fee disclosures. Many plan sponsors don’t have the time, expertise or energy to analyze these new disclosures. That’s a shame because the DOL estimated a three year cost of compliance at over 1.6 million hours or almost $135 million. Not a drop in the bucket in this era of budget deficits.

Topics: ESOP & 401(k) Plans, ERISA