Industry the September 2012 issue

Form and Substance

New ERISA compensation rules require full disclosure regardless of the form of compensation.
By Scott Sinder

The good news is that Labor accepted The Council’s arguments and excluded welfare plans from the scope of these rules (although welfare plan-related fee disclosures are still on its agenda). The bad news is that commissions and other insurer-provided compensation from insurance products for an ERISA pension plan are covered by the new fee-disclosure rule, which took effect July 1.

It appears that errors and omissions policies designed to protect ERISA plan fiduciaries are the most likely type of property-casualty products to fall within the scope of the new rule.

Our understanding is that plan sponsors often purchase errors and omissions policies protecting fiduciaries for single-employer pension plans without using plan assets to pay premiums. For Taft-Hartley union and multi-employer plans, however, the E&O policy often is purchased by the plan. If you receive a contingency or a commission from the sale of policies to plans, you’re likely subject to the new rule.

Labor proposed the rule to ensure that a “responsible plan fiduciary” receives the information necessary from a “covered service provider” to adequately determine whether compensation is reasonable and whether any conflicts of interest are evident. Non-fiduciary insurance and consulting services are covered by the rule but only if three key conditions are met:

  1. The service provider enters into a contract or arrangement with a covered plan
  2. The service provider (or an affiliate or subcontractor) reasonably expects to receive at least $1,000 in compensation in connection with the services it is providing to the plan or to the plan fiduciaries
  3. The service provider (or an affiliate or subcontractor) reasonably expects to receive “indirect compensation” in connection with providing that service. 

If your firm provides only traditional p-c placement services for a covered plan under a fee arrangement and you do not expect any commission, contingent commission or other compensation (including gifts, trips, awards or anything else of monetary value), then you won’t be required to provide any disclosure as long as you and the plan did not mutually agree that you were providing fiduciary services. 

The disclosures apply to any pension plan subject to ERISA, with the exception of:

  • Simplified employee pensions
  • Simple retirement accounts
  • Some annuity contracts and other custodial accounts.
  • Disclosure must include a description of the services provided and the types of compensation:
  • Direct compensation is paid directly by the plan (or sponsor if it expects to be reimbursed by the plan).
  • Indirect compensation can reasonably be expected from any third party. You must identify the services provided for the compensation, disclose the payer and include a description of the arrangement between the recipient and the payer.
  • Related-party compensation is paid between you and an affiliate (and/or subcontractor) for transaction-based services (e.g., commissions, finders’ fees or other similar performance-based incentive compensation).

“Compensation” is broadly defined and includes anything of monetary value, such as cash, gifts, awards, trips and conference expenses borne by an insurer. The Department of Labor has, however, excluded non-aggregate monetary compensation of $250 or less during the term of the contract. It is not clear if this includes disclosing meals or entertainment based on your relationship with an insurer.

No matter what form the compensation takes, it must be disclosed as a monetary amount, a formula, or through “any other reasonable method.” Disclosure may include a reasonable and good faith estimate if you cannot otherwise readily describe the amounts and you explain the methodology and assumptions underlying your estimate. 

Initial disclosure was required by July 1. Going forward, disclosures must be given to the responsible plan fiduciary before the contract takes effect, and changes to prior required disclosures must be provided as soon as possible—and no later than 60 days from the date you become aware of the change.

More guidance on the application of the rule (including its application to annuities and other life products purchased through a pension vehicle) is available from our Steptoe colleagues (from whom we borrowed shamelessly for this column).

Scott Sinder Chief Legal Officer, The Council & Partner, Steptoe & Johnson LLP Read More

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