Category Archives: plan sponsors

More Issues Presented Under 408(b)(2) Regulations


408(b)(2), fiduciary, plan sponsors, prohibited transaction, recordkeeper, service providers, TPA

This is another in a series of articles on interesting issues presented under the 408(b)(2) regulation and its disclosure requirements.

It has become fairly common for plans to have expense recapture accounts (which are also known as ERISA budget accounts, PERAs—plan expense recapture or reimbursement accounts, and by a variety of other names). Typically, those accounts are established within a plan when a service provider (most often the recordkeeper) receives compensation through revenue sharing in excess of its reasonable charges. For example, if a reasonable charge for the recordkeeping/TPA services was $50,000 and the recordkeeper received $60,000 in revenue sharing, the excess amount would be deposited into the expense recapture account—thereby avoiding the prohibited transaction issue of excess compensation.

However, sometimes the recordkeeper/TPA places the money in its corporate account and tells the plan sponsor that the money can be spent for the benefit of the plan . . . at the direction of the plan sponsor. While that presents a number of fiduciary and prohibited transaction issues, it also presents an interesting, and problematic, 408(b)(2) compliance issue for service providers.

For example, when an accounting firm audits a 401(k) plan, it is usually compensated by the plan or the plan sponsor . . . and in that context, the accounting firm is not a “covered” service provider for 408(b)(2) purposes. Since the accounting firm is not covered by the 408(b)(2) regulation, it is not required to make the disclosures under the regulation. However, when an accountant receives “indirect compensation” (which, generally stated, is a payment from anyone other than the plan or plan sponsor), the accounting firm becomes a “covered” service provider and thus must make the required disclosures. Since a payment from a recordkeeper/TPA is not from the plan or the plan sponsor, it is “indirect compensation,” and as a result the accounting firm has become a covered service provider and must make the 408(b)(2) disclosures. But, what happens if the accounting firm hasn’t made those disclosures? The answer is simple . . . the arrangement is a prohibited transaction and the compensation belongs to the plan and not to the accounting firm. But, what if the accounting firm didn’t realize that it was being paid from an account of the recordkeeper/TPA? Unfortunately, there doesn’t seem to be any relief from the prohibited transaction consequences.

Similar issues exist for attorneys, actuaries, consultants and others who receive indirect payments.

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Interesting 408(b)(2) Disclosure Issues


408(b)(2), fiduciary, plan sponsors, prohibited transaction, registered investment advisers, service providers

This is another in a series of emails about interesting issues related to 408(b)(2) disclosures. Since we are doing a considerable amount of work helping service providers comply with 408(b)(2), we have run across a number of less common, or even unusual, situations where the rules may—or may not—apply.

Occasionally, retirement plans invest in partnerships, limited partnerships and LLCs. As a general rule, if 25% or more of a class of equity interest in the entity is held by “benefit plan investors,” the entity is deemed to hold plan assets. As a result, the managing partner will be a fiduciary under ERISA’s rules (similar in concept to a collective trust, in the sense that the assets are held outside the plan, but nonetheless constitute plan assets). In those cases, the managing partner will be a covered service provider under the 408(b)(2) regulation and must make the required disclosures concerning services, status and compensation. The failure to do so will cause the arrangement to become a prohibited transaction.

On the other hand, if less than 25% of the entity is held by benefit plan investors, the holdings of the entity will not be plan assets and, as a result, the managing partner will not be considered to be a covered service provider. Similarly, under ERISA, the assets in a mutual fund are not considered to be plan assets and, as a result, the investment manager of a mutual fund is not a plan fiduciary and is not a covered service provider.

Interestingly—or perhaps curiously—however, plan sponsors must still report compensation arrangements about non-ERISA entities (such as hedge funds with less than 25% benefit plan investors) and mutual funds on Schedule C to the Form 5500. That creates the odd circumstance where plan sponsors are required to report that information on Schedule C, but unlike the arrangements that are subject to 408(b)(2) disclosures, those entities are not required, at least by ERISA, to provide the necessary information to plan sponsors. In other words, we have a regulatory regime that does not fully integrate.

I make these points for several reasons. First, it may be that some people don’t understand that the Schedule C reporting requirements are slightly different than the 408(b)(2) disclosure requirements. That is, while they are identical in most regards, there are also some significant differences, such as the ones described in this article. Secondly, it is likely that some service providers—perhaps RIAs—are managing investments in partnerships or other entities that could be subject to these rules—but that may not realize it. As a result, anyone who manages investments in an entity that is outside retirement plans, but which accepts retirement plan investments, should work with their ERISA counsel to evaluate their status, both under the fiduciary laws and under 408(b)(2).

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