Being a plan fiduciary involves a lot of responsibility. Among other duties, ERISA requires plan fiduciaries to act prudently when selecting service providers. There are generally three categories of covered service providers (CSPs):
- Fiduciaries and Registered investment advisors (excludes advisors who do not provide services directly to a plan, such as fund managers or financial planners hired by a plan participant).
- Platform recordkeepers for DC plans that are participant-directed and designated investment alternatives are made available in connection with the services.
- Other providers receiving any indirect compensation
In order to be exempt from prohibited transaction rules, a plan fiduciary must be sure that a service arrangement is reasonable, the service is necessary and the compensation is reasonable, based on facts and circumstances. (The rules apply to ERISA covered defined benefit and defined contribution plans; the current regulations do not apply to health and welfare plans.)
To determine if a service arrangement is reasonable, a plan fiduciary must obtain certain information, in the form of a disclosure, from its CSPs. If disclosures are not provided, both the CSP and the plan fiduciary could be subject to prohibited transaction excise taxes. Further, if the plan fiduciary does not attempt to obtain the disclosures, he or she could be liable for fiduciary breach. Although the CSP is required to provide the disclosures, plan fiduciaries are held accountable for obtaining the disclosures.
According to the Department of Labor, it is the plan fiduciaries’ responsibility to be sure a CSP who expects at least $1,000 in compensation, discloses the following in writing:
- Services to be provided must be described, along with all direct and indirect compensation. Direct compensation is received directly from the Plan; indirect compensation is generally received from any source other than the plan sponsor, the CSP, an affiliate or subcontractor.
- A description of any arrangement that involves the CSP receiving indirect compensation.
- Compensation allocated among related parties when such charges occur as a result of charges against a plan’s investments or are set on a transaction basis.
- Whether they are providing recordkeeping services and the compensation attributable to that, even when no explicit charge for recordkeeping is identified.
- An investment’s annual operating expenses and any ongoing operating expenses in addition to annual operating expenses.
If there are changes in the information, such changes must be reported as soon as possible, but not later than 60 days after the CSP becomes aware of the change. If you have questions about your fiduciary responsibilities or other compliance issues, contact your CSH advisor.