Interesting 408(b)(2) Disclosure Issues

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).

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.