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Guest Article

(From the July 21, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

DOL Clarifies Compensation to Be Disclosed on New Schedule C

Effective for plan years beginning on and after January 1, 2009, Form 5500 Schedule C will require large pension and welfare plans (i.e., those with 100 or more participants at the beginning of the year) to more fully disclose compensation that is paid -- directly or indirectly -- by the plan to service providers. The Department of Labor has released "FAQs About the 2009 Form 5500 Schedule C," to clarify the new disclosure requirements. The FAQs are available at: www.dol.gov/ebsa/faqs/faq_scheduleC.html.

Brief Overview of New Disclosure Structure

Schedule C requires disclosure for each person who received -- directly or indirectly -- $5,000 or more in total reportable compensation during the plan year in connection with services rendered to the plan. Exempt are payments made directly by the plan sponsor that are not reimbursed by the plan, persons whose only compensation consists of insurance fees and commissions listed in Schedule A, employees of the plan whose compensation in relation to the plan is less than $25,000, and employees of a plan sponsor reported on Schedule C who do not separately receive reportable compensation.

Persons who receive only "eligible indirect compensation" may -- under an alternative reporting option -- simply be identified on Schedule C and excluded from further disclosure. "Eligible indirect compensation" is defined as fees or expenses that are charged to the plan's investment funds and reflected in the value of the investment, including finders' fees, soft dollar revenue, float revenue, and brokerage commissions or transaction-based fees that were not paid directly by the plan or sponsor. In order to constitute "eligible indirect compensation," however, the plan administrator must have received written notice that disclosed the existence of the indirect compensation, the amount of the compensation or the formula used to determine the amount, and the identity of the parties paying and receiving the compensation.

Persons who receive compensation other than or in addition to "eligible indirect compensation" are the subject of more detailed disclosure, which requires that the amounts of direct and indirect compensation (excluding the "eligible indirect compensation") be separately identified and reported.

DOL Guidance

The FAQs provide clarification and valuable insight into various aspects about the new Schedule C reporting, including the following:

Indirect compensation may be reported other than on the plan year. Indirect compensation, or the formula used to calculate it, may be based on the service provider's fiscal or other reporting year ending with or within the plan year (as long as the method is used consistently from year to year).
Alternative reporting option is available for separately managed accounts. For purposes of identifying "eligible indirect compensation," the FAQs explain that the investment funds affected include mutual funds, bank common and collective trusts, and insurance company pooled separate accounts. Separately managed investment accounts that contain assets of an individual plan also are included under the definition. Therefore, the alternative reporting option may be used for indirect compensation received in connection with separately managed investment accounts of employee benefit plans.
Not all expenses charged against an investment fund are indirect compensation. The fund's investment management fee, fees related to the purchase and sale of assets in the fund including 12b-1fees, brokerage commissions and fees charged in connection with purchases and sales of interest in the fund, fees for providing services to plan investors or plan participants such as communication and other shareholder services, and fees relating to the administration of the employee benefit plans such as recordkeeping services, Form 5500 filing and other compliance services, would be reportable indirect compensation for Schedule C purposes.
However, amounts charged against the investment fund for other ordinary operating expenses, such as:
- attorneys fees,
- accountants fees, and
- printers fees
would not be reportable indirect compensation for Schedule C.
The FAQs go on to state that brokerage costs associated with a broker-dealer effecting securities transactions within the portfolio of a mutual fund, or for the portfolio of an investment fund, is an operating expense of the investment fund and not reportable as indirect compensation paid to a plan service provider.
Limited reporting applies to participant selected investments through an open brokerage window. In the case of open brokerage investments, Schedule C reporting can be limited to direct and indirect compensation received by the designated brokers and other brokerage window providers, transaction fees in connection with the purchase, sale, or exchange made through the brokerage window, and any other plan related fees.
Compensation received in connection with the management of venture capital, real estate and other operating companies is not reportable indirect compensation. Fees received by third parties from operating companies, including real estate or venture capital companies, generally would not be reportable indirect compensation. However fees or commissions received by an investment manager or investment advisor in connection with a plan investment in such operating companies would be reportable as indirect compensation.
Any person can provide the written disclosures regarding "eligible indirect compensation." The disclosures need not be made by the service provider receiving the compensation. If multiple persons provide the same disclosure, only one needs to be listed on Schedule C.
Wrap fees may be "eligible indirect compensation." Where insurance contract wrap fees are charged against the plan's investment or are transaction-based fees for transactions involving the plan, they can be treated as "eligible indirect compensation."
Stable-value investment products utilizing a "net rate" to credit interest net of the expenses for recordkeeping, trusteeship and similar services, determined based on the overall experience of the insurer's general account, may be treated as providing "eligible indirect compensation." The fact that the formula for fees is based on overall operating costs of the insurance company would not affect the conclusion that expenses netted in this fashion may be treated as "eligible indirect compensation."
The spread earned by a broker on principal transactions involving the plan are not "eligible indirect compensation." Following the definition of commissions used by the Securities and Exchange Commission, as described in SEC Release No. 34-45194, commissions would include a markup, markdown, commission equivalent, or other fee paid by a managed account to a dealer for executing a transaction where the transaction fee is fully and separately disclosed and reported.
A formula may be used to report indirect compensation. Where a plan administrator receives a formula for amounts reportable as indirect compensation, the administrator may enter "0" for the total indirect compensation received (if that is the only indirect compensation reportable) and indicate "Yes" that the service provider gave a formula instead of an amount. In this case, the formula must be attached to the Schedule C. Where a key service provider (e.g., a fiduciary, contract administrator, etc.) provides a formula for indirect compensation, the amount is presumed to meet the $5,000 threshold. Where a non-key service provider provides a formula, the administrator must either assume the amount meets the $5,000 threshold or calculate an estimate.

The FAQs provide further valuable clarifications which merit examination, including the disclosure requirements applicable to "alliance arrangements." The guidance is clearly structured to achieve a workable approach in meeting the Schedule C reporting requirements -- particularly with regard to reporting indirect compensation and utilizing the alternative reporting option.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955.

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