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On November 16, 2007, the Department of Labor’s Employee Benefits
Security Administration (EBSA) published final form revisions and a
final regulation, generally effective for plan years beginning on or
after January 1, 2009, providing new requirements for reporting service
provider fees and other compensation on the Schedule C of the 2009 Form
5500 Annual Return/Report of Employee Benefit Plan. The purpose of these
FAQs is to provide guidance to plan administrators and service providers
on complying with the requirements of the 2009 Form 5500 Schedule C. Questions concerning this guidance may be
directed to EBSA’s Office of Regulations and Interpretations at
202.693.8523.
Although direct compensation paid by the plan should be reported
based on the plan’s year, the amount or estimate of indirect
compensation or the formula used to calculate indirect compensation may
be based for Schedule C reporting purposes on a service provider’s
fiscal or other reporting year that ends with or within the plan year,
as long as the selected method is used consistently from year to year.
This is similar to the Schedule A rule that allows information on
insurance contracts or policies (including fee and commission
information) to be reported either on the basis of the plan year or the
insurance contract or policy year that ends with or within the plan
year.
Yes. The Schedule C instructions state that “eligible indirect
compensation” includes fees or expense reimbursement payments charged
to “investment funds” and reflected in the value of the plan’s
investment or return on investment. The instructions do not further
define the term “investment fund” for this purpose. Investment funds
would include mutual funds, bank common and collective trusts, and
insurance company pooled separate accounts. In the Department’s view,
the term would also include separately managed investment accounts that
contain assets of an individual plan. Thus, so long as the other conditions for eligible indirect
compensation are met, the Schedule C alternative reporting option can be
used for indirect compensation received in connection with separately
managed investment accounts of employee benefit plans.
No. The Schedule C Instructions provide a general rule that indirect
compensation includes compensation received in connection with services
rendered to the plan or a person's position with the plan. A
person will be considered to receive indirect compensation for Schedule C
reporting purposes if “the person’s eligibility for a payment or the
amount of the payment is based, in whole or in part, on [1] services
that were rendered to the plan or [2] on a transaction or series of
transactions with the plan.” In the case of charges against an
investment fund, reportable “indirect compensation” includes, for
example, the fund’s investment adviser asset-based investment
management fee from the fund, fees related to purchases and sales of
interests in the fund (including 12b-1 fees), brokerage commissions and
fees charged in connection with purchases and sales of interests 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 plan such as recordkeeping
services, Form 5500 filing and other compliance services. Amounts
charged against the fund for other ordinary operating expenses, such as
attorneys’ fees, accountants’ fees, printers’ fees, are not
reportable indirect compensation for Schedule C purposes. Also,
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 that holds “plan assets” for ERISA purposes,
should be treated for Schedule C purposes as an operating expense of the
investment fund not reportable indirect compensation paid to a plan
service provider or in connection with a transaction with the plan.
“Open brokerage windows” in self-directed 401(k) plans allow plan
participants to invest in a wide range of funds, stocks, bonds and other
investments offered through a designated broker for the brokerage
window. Although the requirement to report indirect compensation applies
to participant-selected investments from a range of investment
alternatives under the plan, in the absence of any other guidance,
Schedule C reporting can be limited to direct and indirect compensation
received by the designated broker(s) and other brokerage window
providers, transaction fees in connection with the purchase, sales, or
exchanges made through the brokerage window, and any other plan-related
fees. This limitation on reporting for Schedule C purposes does not
relieve fiduciaries from obligations to prudently select and monitor
designated brokers or other brokerage window providers in a brokerage
window option under the plan.
Yes. Indirect compensation for Schedule C reporting purposes
includes, among other things, payment of ‘‘finder’s fees’’ or
other fees and commissions by a service provider to an independent agent
or employee for a transaction or service involving the plan. Thus,
commissions received from a person, other than those received directly from the
plan or plan sponsor, in connection with the sale of an investment,
product, or service to a plan would be reportable indirect compensation.
The treatment of the commission as reportable indirect compensation is
not dependent on whether the seller or the agent has any other
relationship to the plan other than the sale itself.
No. Although the requirement to report indirect compensation is not
limited to fees received by persons managing plan assets, unlike
investment funds (e.g., mutual funds, collective investment funds), fees
received by third parties from operating companies, including real
estate operating companies (REOC) or venture capital operating companies
(VCOC), in connection with managing or operating the operating company,
generally would not be reportable indirect compensation. Fees or
commissions received by an investment manager or investment adviser in
connection with a plan investment in a VCOC, REOC, or other operating
company would, however, be reportable indirect compensation. This answer
would not be affected by whether the VCOC, REOC, or other operating
company were wholly owned by a plan such that the assets of the entity
would be deemed to be plan assets.
Plan recordkeepers may receive fees for shareholder services and recordkeeping
services directly or indirectly from investment providers
under a wide variety of arrangements. Among others, they may receive
compensation from fund agents (such as fund administrators, advisers or
distributors) as well as other agents, representatives or intermediaries
such as mutual fund “platform” providers, broker-dealers, banks, and
insurance companies.
The fees for compliance services received by the recordkeeper from
the mutual fund agent are reportable indirect compensation. The
alternative reporting option for eligible indirect compensation would
not apply to such payments because the payments are not among the
categories listed in the Schedule C instructions for eligible indirect
compensation. Instructions to Schedule C define “eligible indirect
compensation” as “[i]ndirect compensation that is fees or expense
reimbursement payments charged to investment funds and reflected in the
value of the investment or return on investment of the participating
plan or its participants[,] finders’ fees[,] ‘soft dollar’
revenue, float revenue, and/or brokerage commissions or other
transaction-based fees for transactions or services involving the plan
that were not paid directly by the plan or plan sponsor (whether or not
they are capitalized as investment costs).”
Amounts received by a plan recordkeeper from fund
agents would not constitute
eligible indirect compensation on the basis of being “other
transaction-based fees for transactions or services involving the
plan” merely because the plan had to make an investment in the mutual
fund before the recordkeeper would receive any fees. If such a broad
interpretation of “transaction-based fees for transactions or services
involving the plan” were adopted for purposes of the eligible indirect
compensation definition, it would substantially undermine the bundled
fee reporting option which requires “transaction based” fees to be
reported separately from the bundle.
Unless the recordkeeper's fees are charged to the investment fund
and reflected in the value of the plan’s investment, the fees received
by a recordkeeper would not constitute eligible indirect compensation
regardless of whether the fund agent determines the recordkeeper's compensation using an asset-based formula or a flat per participant fee.
No. For the same reasons described above, the amounts paid by the
insurer to the recordkeeper in connection with a plan's investments do
not constitute eligible indirect compensation. If the amount paid to the
recordkeeper is reported on a Schedule A filed for the plan, and the
recordkeeper did not receive any other compensation reportable on the
Schedule C, the amounts would not have to be reported again on the
Schedule C.
Float income is specifically listed as a form of indirect
compensation in the Schedule C instructions. The fact that the float revenue
is received as “transaction float” or “check float” on the
account of a single plan rather than at an omnibus account level would
not require it to be treated as direct compensation for Schedule C
reporting purposes.
Disclosure of float income sufficient to satisfy the guidance under
Field Assistance Bulletin 2002-03 will generally be sufficient to
satisfy the disclosure requirements for the Schedule C alternative
reporting option. In order to satisfy the Schedule C alternative
reporting option, the disclosure must disclose the existence of the
indirect compensation, the amount (or estimate) or a description of the
formula used to calculate or determine the compensation, an explanation
of the reason for the payment of float income, and the parties paying
and receiving the float income.
The instructions for Schedule C provide that for Schedule C reporting
purposes, a bundled service arrangement includes any service
arrangements where the plan hires one company to provide a range of
services either directly from the company, through affiliates or
subcontractors, or through a combination, which are priced to the plan
as a single package rather than a service-by-service basis. The
instructions further state that a bundled service arrangement would also
include an investment transaction in which the plan receives a range of
services either directly from the investment provider, through
affiliates or subcontractors, or through a combination. As long as all
the compensation required to be reported is identified on the Schedule C
or disclosed in accordance with the rule for “eligible indirect
compensation,” there is flexibility in determining what services or
providers are included as part of a bundled arrangement.
The Schedule C instructions include a general rule that, in the case
of bundled service arrangements, revenue sharing within the bundled
group generally does not need to be separately reported, with two
exceptions.
The first exception is that any person in the bundle receiving
separate fees charged against a plan's investment (e.g., investment
management fees, float revenue, and other asset-based fees, such as
shareholder servicing fees, 12b-1 fees, and wrap fees if charged in
addition to the investment management fee) must be treated as receiving
separately reportable compensation for Schedule C purposes.
Examples of separate fees charged against a plan’s investment for
purposes of this exception are revenue sharing payments for shareholder
services, recordkeeping or compliance services that are paid by an
investment provider to a third party administrator ("TPA") if
they are charged against the plan’s investment as a separate amount or
pursuant to a separate formula. Thus, if the investment provider pays
the TPA out of an overall investment management or shareholder services
charge assessed against the plan’s investment the payment to the TPA
by the investment manager out of its fees would not be a separate fee
for this purpose. The second exception is that compensation must be separately
reported if (i) the compensation is received by any person in the bundle
who is one of the service providers enumerated on Line 3 of Schedule C,
and (ii) the compensation received is "commissions and other
transaction based fees, finders’ fees, float revenue, soft dollars and
other non-monetary compensation."
No. The only information required when the alternative reporting
option is being used with respect to a particular service provider is
the identifying information on Line 1. However, for a service provider
who receives $5,000 or more in “eligible indirect compensation” and other reportable indirect compensation, the service provider must
be separately listed on line 2 and “key” service provider
information must be reported on line 3.
No. Line 3 of Part I of the Schedule C states that ”If you reported
on line 2 receipt of indirect compensation, other than eligible indirect
compensation, by a service provider . . .” (emphasis added). This
instruction makes it clear that the Line 3 reporting only is required
for indirect compensation that is not eligible indirect compensation.
For example, if a service provider receives both eligible indirect
compensation (including satisfaction of the disclosure requirements) and
other indirect compensation, Line 3 reporting only applies with respect
to the portion of the service provider's compensation that does not
constitute eligible indirect compensation.
No. Line 2(h) is a follow up question to line 2(g), and only need be
completed with respect to indirect compensation excluding eligible
indirect compensation.
No. Any person can provide the required disclosures.
No. Multiple persons can be listed on the Schedule C as providing
different required disclosures, but if multiple persons provide the same
disclosures, only one person must be listed for the disclosure or
disclosures.
No. The person listed may be an individual or entity that actually
furnished the disclosures to the plan. If a mutual fund prospectus is
used to provide required disclosures for eligible indirect compensation,
however, it would not be sufficient to identify the mutual fund as
providing the prospectus unless the mutual fund itself provided the
prospectus directly to the plan.
Where the wrap fees are charged against the plan’s investment or
are transaction-based fees for transactions or services involving the
plan, they can be treated as “eligible indirect compensation.”
The fact that expenses that constitute reportable compensation are
netted against the crediting rate in determining the plan’s rate of
return on the stable value contract would not be a basis for excluding
those expenses as reportable compensation for Schedule C purposes.
Further, the fact that the formula for the fees is based on overall
operating costs of the insurance company would not affect that
conclusion. Expenses “netted” in this fashion may be treated as fees
charged against the plan’s investment and reflected in the value of
the plan’s investment for purposes of the Schedule C alternative
reporting option for eligible indirect compensation.
No. For this purpose, the Department will follow the definition of commission used
by the Securities and Exchange Commission under Section 28(e) of the
Exchange Act as described in SEC Release No. 34-45194. Thus, securities
commissions for Schedule C purposes would include a markup, markdown,
commission equivalent, or other fee paid by a managed account to a
dealer for executing a transaction where the fee and transaction price
are fully and separately disclosed on the confirmation and the
transaction is reported under conditions that provide independent and
objective verification of the transaction price subject to
self-regulatory organization oversight. Fees paid for eligible riskless
principal transactions that are reported under NASD Rule 4632, 4642, or
6420 would fall within this interpretation.
Yes. The preamble to the final amendments to regulations relating to
the annual reporting requirements states that ”[f]ilers generally have
the option of reporting a formula used to calculate indirect
compensation received instead of an actual dollar amount or estimate . .
..” 72 Fed. Reg. 64710, 64712 (Nov. 16, 2007). It is permissible to
use a formula for reporting indirect compensation even in cases where it
may be possible for the service provider to calculate a monetary amount
or estimate. The Department, therefore, would not expect service
providers to be identified on the Schedule C as failing to provide
information necessary to complete the Schedule C merely because they
provided a formula when disclosing their indirect compensation to plan
administrators, including for indirect compensation that is not
“eligible indirect compensation.”
No. Element (g) on Line 2 of Part I of Schedule C requires the plan
administrator to enter the “total of all indirect compensation that is
not eligible indirect compensation” and Element (c) on Line 3 of Part
I of Schedule C states that the plan administrator should “Enter
amount of indirect compensation.” Where a plan administrator receives
a formula from a service provider for amounts reportable on Line 2, the
plan administrator may enter “0” if that is the only indirect
compensation reportable in element (g) on Line 2. The plan administrator
must check “yes” in element (h) of Line 2, and attach a statement
describing the formula(s) that is labeled “Schedule C, Line 2(h)
formula description.” Where a plan administrator receives a formula
from a service provider for amounts reportable on Line 3, the plan
administrator may enter “0” if that is the only indirect
compensation reportable in element (c) on Line 3. The plan administrator
must include in element (e) on Line 3, a description of the formula(s).
If a "key" service provider reports its compensation by a
formula, the amount of indirect compensation is presumed to meet the
$5000 reporting threshold. Also, if any key service provider reports a
formula for its indirect compensation (that is not eligible indirect
compensation), information about that indirect compensation is
reportable on Part I, Line 3 of Schedule C. Key service providers are
those service providers for which Schedule C, Part I, Line 3 reporting
is required (i.e., service providers who are fiduciaries, or who provide
contract administrator, consulting, custodial, investment advisory,
investment management, broker, or recordkeeping services).
In the case of service providers that are not key service providers,
a plan administrator must either assume that the $5000 reporting threshold is
met if a service provider provides only a formula for its compensation
or calculate an estimate from the formula to determine whether the $5000
reporting threshold is met. Although the plan administrator is
ultimately responsible for determining whether the $5,000 reporting
threshold is met, the plan administrator may rely for Schedule C
reporting purposes on an estimate of
compensation provided by a service provider in the absence of any
information that should lead the administrator to question the estimate.
Plan administrators are not required to calculate estimates of
service providers’ total direct and indirect compensation merely for
purposes of reporting service providers in descending order of
compensation on Part I, Line 2. The plan administrator should list the
most highly compensated service providers first to the extent the plan
administrator has total actual or estimated compensation data. If total
compensation data is not available, however, the plan administrator may
list service providers in any reasonable order.
Service providers that provide an estimate of their indirect
compensation may use any reasonable method for developing an estimate,
as long as the method is disclosed with the estimate. Where more than
one reasonable method is available for generating an estimate, it would
be appropriate for the plan and the service provider to consider the
relative costs involved in selecting a method.
No. A second disclosure with the actual dollar amount does not need
to be obtained in order to rely on the alternative reporting option.
It
may be appropriate for the plan administrator in such circumstances to
consider obtaining information about a dollar amount as part of
monitoring the service arrangement, e.g., to verify the reliability of
an estimate or to confirm that a formula was correctly applied.
As long as the person who is identified on the Schedule C as
providing the required disclosures for the eligible reporting option
advises the plan administrator that disclosures in those documents are
intended to satisfy the alternative reporting option in addition to
serving the other purposes for which the documents were generated,
provision of existing documents will satisfy the alternative reporting
option if a reasonable plan administrator can readily determine from the
documents: (a) the existence of the indirect compensation; (b) the
services provided for the indirect compensation or the purpose for the
payment of the indirect compensation; (c) the amount (or estimate) of
the compensation or a description of the formula used to calculate or
determine the compensation; and (d) the identity of the party or parties
paying and receiving the compensation. Furnishing the plan administrator
with a separate document that identifies the other already provided
documents that contain the required information also would satisfy the
eligible indirect compensation disclosure requirement provided the
separate document includes references to pages or sections of the
document that contain the required information.
Yes. Electronic disclosures can be used satisfy the “written
disclosure” requirement for the alternative reporting option. There must be some record that affirmatively indicates that the
"written materials" were received by the plan administrator,
and those records must be retained in accordance with ERISA’s recordkeeping
requirements.
There is no specific requirement that the disclosures be provided
annually. In order to take advantage of the alternative reporting
option, however, the plan administrator must review the disclosures at
least annually in connection with the preparation of the Form 5500 and
confirm that the information continues to be correct. If any of the
required information has changed, updated disclosures would be required
to take advantage of the alternative reporting option. Also, the plan
administrator must retain for the period required under section 107 of
ERISA documentation sufficient to demonstrate the results of this
review.
Accurately reconciled post-trade confirmations may be relied upon to
satisfy the written disclosure requirements for eligible indirect
compensation if, either alone or in conjunction with other disclosures,
the plan administrator receives the required information.
Payments for meals, hotel, transportation costs, tickets to a
sporting or entertainment event, and other individual expenses would be
reportable indirect compensation. Waiver of any conference registration
fee would also be reportable indirect compensation. Conference overhead
expenses, such as guest speaker fees, conference space rental,
continental breakfast and other refreshment expenses normally included in the
cost of the conference registration fee, are not reportable indirect
compensation for Schedule C reporting purposes.
Administrators are allowed to exclude non-monetary compensation of
insubstantial value (such as gifts or meals of insubstantial value)
which is tax deductible for federal income tax purposes by the person
providing the gift or meal and would not be taxable income to the
recipient. The gift or gratuity must be valued at less than $50, and the
aggregate value of gifts from one source in a calendar year must be
valued at less than $100. If the $100 aggregate value limit is exceeded,
then the value of all the gifts will be reportable compensation. The
instructions state that, for this purpose, gifts of less than $10 do not
need to be counted toward the $100 limit. Gifts of less than $10 also do
not need to be included in calculating the aggregate value of all gifts
required to be reported if the $100 limit is exceeded.
It depends. The Schedule C instructions state that indirect
compensation would not include compensation that would have been
received had the service not been rendered to the plan or the
transaction had not taken place with the plan and that cannot be
reasonably allocated to the service(s) performed or transaction(s) with
the plan. However, if a person’s eligibility for receipt of a gift
(such as meals, travel, or entertainment) is based, in whole or in part,
on the value (e.g., assets under management, contract amounts, premiums)
of contracts, policies or transactions (or classes thereof) placed with
ERISA plans, the gift would constitute reportable indirect compensation
for Schedule C purposes. Where the eligibility for or amount of the gift
is based on an book of business, including ERISA plan business, a pro
rata share of the value of the gift should be treated as indirect
compensation for the ERISA plans involved.
A determination of whether non-monetary compensation is reportable
indirect compensation is not necessary if the allocable dollar value of
the gift is below the thresholds for Schedule C reporting on
non-monetary compensation even if the service provider received other
reportable compensation that is at or above the $5,000 threshold. For
example, a broker sends a holiday gift basket worth
$75 to an investment manager with which it has an established business
relationship. Ninety percent of the business the broker has with the
investment manager is non-ERISA plan business. A reasonable allocation
method would be pro rata so the amount for any particular ERISA plan
would be less than $10 for Schedule C reporting purposes and would not
be required to be reported on any plan’s Form 5500 as indirect
compensation received by the investment manager.
Compensation reported on Schedule A is not required to be reported
again on Schedule C. The amount of the compensation that must be
reported on Schedule A must, however, be taken into account in
determining whether the Schedule C-only compensation plus the Schedule A
compensation is $5,000 or more and thus, required to be reported. For
example, if a broker received $4,000 in insurance commissions from an
insurance company in connection with policies purchased by the plan and
$2,000 from the plan for providing consulting services to the plan, the
plan’s 5500 filing would include a Schedule A identifying the $4,000
in commissions and a Schedule C entry for the broker reporting the
$2,000 for the consulting services provided to the plan.
Yes. When a plan sponsor pays a plan third-party service provider and then seeks
reimbursement from the plan, the Schedule C for the plan should reflect
a direct payment from the plan to the service provider. In this regard,
direct compensation is defined in the instructions for purposes of
Schedule C as ”[p]ayments made directly by the plan for services
rendered to the plan or because of a person's position with the plan”
and excludes ”[p]ayments made by the plan sponsor, which are not
reimbursed by the plan . . . .” The Department notes that if the plan
sponsor pays a service provider directly, and does not seek
reimbursement from the plan, such payment does not need to be reported
on the Schedule C.
No. Fees for non-plan related investment services provided directly
to participants that are not paid by the plan, charged to a plan
account, or reflected in the value of plan investments are not
reportable compensation for Schedule C purposes. This should not
be read as expressing any view on the application of ERISA's fiduciary
responsibility or other provisions to such an arrangement.
Yes. Both proprietary and non-proprietary soft dollar revenue can be
treated as “eligible indirect compensation” for purposes of the
alternative reporting option if the written disclosure requirements are
also met.
The Department recognizes that, in order to furnish their employee
benefit plan clients information necessary to comply with the new
Schedule C annual reporting requirements, certain service providers may
have to modify their current recordkeeping and information management
systems. The Department also recognizes that it may be difficult for
some service providers to make those adjustments sufficiently in advance
so that their systems will be fully operational when employee benefit
plan clients start to make requests for, or otherwise need, Schedule C
related data for filing their 2009 plan year Form 5500. In an effort to
address the concerns of both service providers and plans, the Department
has decided that, with respect to those employee benefit plans which are
dependent on service providers for information necessary to complete the
Schedule C, the plan administrator will not be required for 2009 plan
year reports to list a service provider on line 4 of the Schedule C as
failing to provide information necessary to complete the Schedule C if
the plan administrator receives from the service provider a statement
that (i) the service provider made a good faith effort to make any
necessary recordkeeping and information system changes in a timely
fashion, and (ii) despite such efforts, the service provider was unable
to complete the changes for the 2009 plan year.
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