Revision of Annual Information Return/Reports
[11/16/2007]
Volume 72, Number 221
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
DEPARTMENT OF THE TREASURY
Internal Revenue Service
PENSION BENEFIT GUARANTY CORPORATION
RIN 1210-AB06
Revision of Annual Information Return/Reports
AGENCIES: Employee Benefits Security Administration, Labor, Internal
Revenue Service, Treasury, Pension Benefit Guaranty Corporation.
ACTION: Notice of adoption of revisions to annual return/report forms.
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SUMMARY: This document contains revisions to the Form 5500 Annual
Return/Report forms, including the Form 5500 Annual Return/Report of
Employee Benefit Plan and a new Form 5500-SF, Short Form Annual Return/
Report of Small Employee Benefit Plan (Short Form 5500 or Form 5500-
SF), filed for employee pension and welfare benefit plans under the
Employee Retirement Income Security Act of 1974, as amended (ERISA),
and the Internal Revenue Code of 1986, as amended (Code). The Form 5500
Annual Return/Report forms, including the schedules and attachments,
are an important source of financial, funding, and other information
about employee benefit plans for the Department of Labor, the Pension
Benefit Guaranty Corporation, and the Internal Revenue Service (the
Agencies), as well as for plan sponsors, participants and
beneficiaries, and the general public. The revisions to the Form 5500
Annual Return/Report forms contained in this document, including the
new Short Form 5500, are intended to streamline the annual reporting
process, reduce annual reporting burdens, especially for small
businesses, update the annual reporting forms to reflect current issues
and agency priorities, incorporate new reporting requirements contained
in the Pension Protection Act of 2006, and facilitate electronic
filing. Some of the forms revisions will apply on a transitional basis
for the 2008 reporting year before all of the forms revisions are fully
implemented for the 2009 reporting year as part of the switch under the
ERISA Filing Acceptance System (EFAST) to a wholly electronic filing
system (EFAST2). The forms revisions affect employee pension and
welfare benefit plans, plan sponsors, administrators, and service
providers to plans subject to annual reporting requirements under ERISA
and the Code.
DATES: Effective January 15, 2008.
FOR FURTHER INFORMATION CONTACT: Elizabeth A. Goodman or Michael I.
Baird, Employee Benefits Security Administration (EBSA), U.S.
Department of Labor, (202) 693-8523, for questions relating to the Form
5500, and its Schedules A, C, D, G, H, and I, and lines 1 through 11 of
the Form 5500-SF (Short Form 5500), as well as the general reporting
requirements under Title I of ERISA; Lisa Mojiri-Azad, Internal Revenue
Service (IRS), Office of Chief Counsel, (202) 622-6060, or Ann Junkins,
IRS, (202) 283-0722, for questions relating to Schedules SB, MB, and R
of the Form 5500, lines 12 and 13 of the Short Form 5500, and the
filing of Short Form 5500 instead of the Form 5500-EZ for plans that
are not subject to Title I of ERISA, as well as questions relating to
the general reporting requirements under the Internal Revenue Code; and
Michael Packard, Pension Benefit Guaranty Corporation (PBGC), (202)
326-4080, ext. 3429, for questions relating to Schedules SB and MB of
the Form 5500, and lines 13 through 19 of Schedule R, as well as
questions relating to the general reporting requirements under Title IV
of ERISA. For further information on an item not mentioned above,
contact Mr. Baird. The telephone numbers referenced above are not toll-
free numbers.
SUPPLEMENTARY INFORMATION:
A. Background
Sections 101 and 104 of Title I and section 4065 of Title IV of the
Employee Retirement Income Security Act of 1974, as amended (ERISA),
sections 6058(a) and 6059(a) of the Internal Revenue Code of 1986, as
amended (Code), and the regulations issued under those sections, impose
certain annual reporting and filing obligations on pension and welfare
benefit plans, as well as on certain other entities.\1\ Plan
administrators, employers, and others generally satisfy these annual
reporting obligations by the filing of the Form 5500 Annual Return/
Report of Employee Benefit Plan, including its schedules and
attachments (Form 5500 Annual Return/Report), in accordance with the
instructions and related regulations.
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\1\ Other filing requirements may apply to certain employee
benefit plans and to multiple-employer welfare arrangements under
ERISA or to other benefit arrangements under the Code, and such
other filing requirements are not within the scope of this Notice.
For example, Code sec. 6033(a) imposes an additional reporting and
filing obligation on organizations exempt from tax under Code sec.
501(a), which may be related to retirement trusts that are qualified
under sec. 401(a) of the Code.
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The Form 5500 Annual Return/Report is the principal source of
information and data available to the Department of Labor (Department
or Labor), the Internal Revenue Service (IRS), and the Pension Benefit
Guaranty Corporation (PBGC) (collectively, Agencies) concerning the
operations, funding, and investments of about 800,000 pension and
welfare benefit plans. These plans cover an estimated 150 million
participants and hold an estimated $4.3 trillion in assets.
Accordingly, the Form 5500 Annual Return/Report constitutes an integral
part of each Agency's enforcement, research, and policy formulation
programs, and is a source of information and data for use by other
federal agencies, Congress, and the private sector in assessing
employee benefit, tax, and economic trends and policies. The Form 5500
Annual Return/Report also serves as a primary means by which plan
operations can be monitored by participants and beneficiaries and by
the general public.
On July 21, 2006, the Department published a final rule requiring
electronic filing of the Form 5500 Annual Return/Report for reporting
years beginning on or after January 1, 2008 (Electronic Filing Rule).
71 FR 41359. Simultaneously with the publication of the Electronic
Filing Rule, the Agencies published a notice of proposed forms
revisions (July 2006 Proposal) proposing changes to the Form 5500
Annual Return/Report for the 2008 reporting year. 71 FR 41615. On
December 11, 2006, the Agencies published a Notice of Supplemental
Proposed Forms Revisions (Supplemental Notice). 71 FR 71562. The
Supplemental Notice was necessary to make changes to the Form 5500
Annual Return/Report required by the Pension Protection Act of 2006,
Pub. L. 109-280, 120 Stat. 780 (2006), enacted on August 17, 2006
(PPA).
The Agencies received 38 comment letters on the July 2006
Proposal,\2\ and seven comments on the Supplemental Notice. Comments
were submitted by various members of the regulated community, including
representatives of employers, plans, and plan service providers. Copies
of the comments are
[[Page 64732]]
posted on the Department's Web site at http://www.dol.gov/ebsa/regs.
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\2\ The Agencies also received a comment letter from the United
States Department of Commerce, Economic and Statistics
Administration, Bureau of Economic Analysis (BEA), that indicated
that the BEA relies on the information collected in the Form 5500 to
prepare certain statistics.
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After careful consideration of the issues raised by the written
public comments, the Agencies decided to adopt the forms largely as
proposed, but, in an attempt to strike a balance between ensuring
adequate reporting and disclosure to participants, beneficiaries, and
the Agencies, on the one hand, and the costs and administrative burdens
attendant to the administration and maintenance of employee benefit
plans on the other, the Agencies revised some of the annual reporting
requirements in response to public comments. The Agencies now are
publishing in this Notice the final forms revisions for the Form 5500
Annual Return/Report (including the Short Form 5500), generally
effective for the 2009 reporting year (with certain transition changes
effective for the 2008 reporting year). Set forth below is a general
summary of the public comments received in response to the proposals,
changes made in response to those comments, and an overview of the
final forms revisions being adopted in this Notice.
The Agencies are printing in this Notice information copies of the
2009 Form 5500, 2009 Form 5500-SF, and 2009 Schedules A, SB, MB, C, D,
G, H, I, and R. This Notice also includes information copies of the
related instructions, except for the instructions to the Schedule SB
and MB and certain new questions on the Schedule R, which the Agencies
will publish after the Treasury/IRS develop the underlying substantive
guidance under the PPA, and certain instructions relating to electronic
filing procedures under the EFAST2 system. Information copies of the
forms and the instruction package will also be posted on the
Department's Web page at http://www.dol.gov/ebsa. Because of the switch
to EFAST2 and a wholly electronic filing requirement, the information
copies of the 2009 annual return/report forms printed in this Notice
are not acceptable for and cannot be used for filing an annual return/
report under the EFAST2 system. Once the EFAST2 contract is awarded to
a firm to develop the new wholly electronic filing system for the 2009
Form 5500 Annual Return/Report forms, including the Form 5500-SF, the
contractor may as part of its development of the new system need to
make technical reformatting changes to the forms that may affect the
appearance of the forms. Details on any changes to the appearance of
the forms and on the wholly electronic filing and processing system,
including details on electronic signature requirements, will be
available as the contract is awarded and the system development is
finalized. Although the paper forms will not be used for filing under
the EFAST2 system, the final format of the forms and schedules will be
the required format for satisfying disclosure obligations under ERISA,
including the plan administrator's obligation to furnish copies of the
annual report to participants and beneficiaries on request pursuant to
section 104(b) of ERISA.
B. Discussion of the Public Comments
1. Deferral of Forms Revisions and Electronic Filing Mandate to the
2009 Plan Year
A significant number of the commenters, including several large
industry groups representing plan sponsors and service providers, asked
for a delay in the effective date of the forms changes. A number of the
commenters asked for additional time to comment due to work being done
to implement new statutory requirements enacted as part of the PPA.
Some commenters also suggested that the comment period should be
extended to allow more time to address the Schedule C (Service Provider
Information) changes due to the significance of the changes in plan fee
and expense reporting, the attendant compliance costs, and a desire to
evaluate the Schedule C changes in conjunction with proposed
regulations the Department has announced it will be publishing under
ERISA section 408(b)(2).\3\ Three different commenters suggested that
the effective date for the new reporting requirements for Code section
403(b) plans be delayed until after the IRS publishes its final
regulation on Code section 403(b) plans. Some commenters urged that the
effective date be extended for the Form 5500 Annual Return/Report
changes until 2009 or 2010 at the earliest to allow sufficient time to
make necessary changes to comply with the new requirements. One
commenter, who requested a delayed implementation date generally for
the new forms and electronic filing requirement, suggested an earlier
implementation date for the Short Form 5500 as a way of satisfying the
PPA requirement of a simplified report for plans with fewer than 25
participants.
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\3\ As set forth in the Department's semi-annual regulatory
agenda, 72 FR 22845, the rulemaking would amend the regulation at 29
CFR section 2550.408b-2 setting forth the standards applicable to
the exemption under ERISA section 408(b)(2) for contracting or
making reasonable arrangements with a party in interest for office
spaces or services. The proposed amendment is intended to ensure
that plan fiduciaries are provided or have access to the information
necessary to determine whether an arrangement for services is
``reasonable'' within the meaning of the statutory exemption, as
well as within the meaning of the prudence requirements of ERISA
section 404(a)(1)(B).
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The proposed revisions to the Form 5500 Annual Return/Report, which
include both those set forth in the Agencies' July 2006 Proposal and
those in the Supplemental Notice to address changes required by the
PPA, are part of the switch under the ERISA Filing Acceptance System
(EFAST) to a wholly electronic filing and processing system (EFAST2)
that would replace the existing largely paper-based filing system. As
part of that e-filing initiative, and as noted above, the Department
published the Electronic Filing Rule, establishing an electronic filing
requirement for annual reports filed for plan years beginning on or
after January 1, 2008. In adopting the final Electronic Filing Rule,
the Department responded to public comments seeking a delay in the
wholly electronic filing system by agreeing to a one year deferral of
the electronic filing mandate from the 2007 plan year to the 2008 plan
year. The Department agreed to the deferral in order to facilitate an
orderly and cost-effective migration to an electronic filing system by
both the Department and the regulated community. Under the final
Electronic Filing Rule published in July 2006, the vast majority of
filers would have had until at least July 2009 to make any necessary
adjustments to accommodate the electronic filing of their annual report
because annual reports generally are not required to be filed until the
end of the 7th month following the end of the plan year. The timing
also provided service providers, software developers, and the
Department additional time to work through electronic filing and
processing issues.
In evaluating the public comments seeking a further deferral of the
implementation of the revised forms and, as a consequence, the
electronic filing requirement, the Agencies evaluated the benefits of
giving the regulated community more time to transition to the new
EFAST2 electronic filing system, keeping in mind the effective dates
mandated by the PPA for certain of the annual reporting changes. The
Agencies continue to believe it is important for plans, service
providers, and the Agencies to have an orderly and cost-effective
migration to the EFAST2 electronic filing system. In light of the
substantial number of comments expressing concern about needing more
time to adjust recordkeeping and other annual reporting systems, the
Agencies have decided to defer for an additional
[[Page 64733]]
year the implementation of annual reporting forms changes not mandated
by the PPA,\4\ except for a few Schedule R items that the PBGC had
determined that it needs to enable it to properly monitor the plans it
insures. Thus, the current EFAST filing system will be continued for
the 2007 and 2008 plan year filings. This includes the requirements to
file the Schedule E, the Schedule SSA, and the IRS Form 5500-EZ,
``Annual Return of One-Participant (Owners and Their Spouses)
Retirement Plan'' (Form 5500-EZ), under the current EFAST system with
the Department for the 2007 and 2008 reporting years. Also, as provided
in the Electronic Filing Rule, delinquent or amended filings for prior
plan years for which paper filing options were available also will be
subject to the electronic filing requirement. The deferral of the
electronic filing requirement applies to delinquent and amended
filings. The Department will provide instructions prior to the
inauguration of the system on how those filings are to be made under
the electronic filing system.
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\4\ It is significant to note that the implementation of the
annual reporting form changes not mandated by the PPA has been
deferred until after the publication of the IRS final regulations on
Code section 403(b) plans.
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Under the final regulations, the electronic filing requirement and
all of the forms changes, except for those mandated by the PPA and the
PBGC's new Schedule R items discussed below, will become effective for
all annual report filings made under Part 1 of Subtitle B of Title I of
ERISA for plan years (or reporting years for non-plan filings)
beginning on or after January 1, 2009.\5\
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\5\ The Supplemental Notice explained that the Department
believed that the EFAST2 system would satisfy the PPA requirement
that the Department make available electronically on its Web site
certain actuarial information filed as part of the Form 5500 Annual
Return/Report. See PPA Sec. 504, 29 U.S.C. Sec. 104(b). The
Department believes that the related provision in the PPA calling
for actuarial information to be filed electronically was intended to
facilitate the Department's ability to meet its obligation to post
the actuarial information on its Web site within 90 days after the
information is filed as part of the plan's annual report. The
Department believes it can still satisfy the web posting requirement
under the current EFAST system without imposing a special electronic
filing requirement on defined benefit pension plans for the
transition 2008 plan year.
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To effectuate the postponement of the electronic filing
requirement, the Department, in the final rule being published
contemporaneously with this Notice amending its annual reporting
regulations, is including an amendment to the Electronic Filing Rule.
Specifically, that final rule amends the Department's regulation at 29
CFR 2520.104a-2 to provide that the electronic filing requirement is
applicable for plan years beginning on or after January 1, 2009. The
vast majority of filers will now have until at least July 2010 to make
any necessary adjustments to accommodate the non-PPA required changes
(other than the PBGC Schedule R changes) to the form and those required
for electronic filing of their annual report because, as noted above,
annual reports generally are not required to be filed until the end of
the 7th month following the end of the plan year.
Short plan year filings for 2009 plan years and filings for DFEs
for 2009 reporting years will be subject to a special transition rule.
The instructions to the Form 5500 Annual Return/Report advise filers
that the due date for their Form 5500 for a plan year of less than 12
months (short plan year) is the last day of the 7th month after the
short plan year ends. For purposes of determining the filing deadline,
the instructions state that a short plan year ends on the date of the
change in accounting period or upon the complete distribution of assets
of the plan in the case of terminated or merged plans. For DFE filings,
the instructions provide that DFEs (other than GIAs) must file 2009
return/reports no later than nine and one half months after the end of
the DFE year that ended in 2009, and the 2009 Form 5500 must report
information for the DFE year (not to exceed 12 months in length). The
Agencies historically have permitted short plan year filers and DFEs to
use the prior year's forms if the current year forms are not available
by the plan's or DFE's filing due date. The Agencies expect that, in
some cases, filings for 2009 short plan years and DFE filings for 2009
reporting years (e.g., if the DFE year differs from the 2009 calendar
year) may be due during 2009 and before the January 1, 2010, date on
which the new EFAST2 wholly electronic filing system is expected to
become operational for return/report filing purposes. Plans filing for
2009 short plan years and DFEs filing for 2009 reporting years will
have the option of using the 2008 Form 5500 Annual Return/Report forms
and filing for 2009 under the current EFAST filing system if they file
before the date the new EFAST2 electronic filing system becomes
operational. Alternatively, plans whose due date for their 2009 short
plan year filing and DFEs whose due date for their 2009 reporting year
filing falls before the new EFAST2 system becomes operational but who
want to file electronically under the new EFAST2 system will be granted
an automatic extension until after the EFAST2 system becomes
operational in which to file. The Agencies intend to describe the terms
and conditions for the automatic extension in the instructions for the
2008 Form 5500 Return/Report.
a. PPA-Required Actuarial Schedules, Multiemployer Plan Reporting, and
Asset Allocation Information
The PPA-required changes in the Form 5500 Annual Return/Report
(other than the simplified reporting requirement) are the new actuarial
information schedules (Schedules SB and MB), lines 13a and 13b of the
Schedule R (identifying information on significant contributors to
multiemployer defined benefit plans), lines 14-17 of the Schedule R
(additional information related to multiemployer defined benefit
pension plans), line 18 of the Schedule R (certain liabilities to
participants and beneficiaries under two or more pension plans), and,
for multiemployer defined benefit plans only, the new line 7 of the
Form 5500 (number of employers with an obligation to contribute to the
multiemployer plan).\6\ To comply with the PPA, these reporting changes
are being implemented under the current EFAST system for 2008 plan year
annual reports.
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\6\ The text of the question on the new line 7 has been revised
from that in the July 2006 proposal to exactly match the language in
the annual reporting requirement in the PPA.
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The Agencies concluded that it would not be cost-effective or
practical to create computer scannable versions of the Form 5500 and
these schedules to be compatible with the outdated EFAST computer
scannable form technology because these forms would have a limited one
year useful life under the EFAST system during the transition period
before implementation of the EFAST2 electronic filing system. Effective
for the 2008 transition year, plans required to file actuarial
information must check the box on the Form 5500 to indicate that they
are filing a Schedule B, but instead of filing the current Schedule B,
they will file Schedule SB or MB (whichever is applicable). The
Schedule B will no longer be a valid schedule for 2008 plan year
filings. Plan year 2008 Form 5500 Annual Return/Reports filed by
pension plans subject to the minimum funding rules must include a
Schedule SB or MB and not a Schedule B for 2008 plan years. Filings
that include a Schedule B instead of a Schedule SB or MB will be
rejected. As to the other PPA-required items (lines 13a, 13b, and 14-18
of Schedule R and line 7 of Form 5500), for
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the transition year, filers will be directed in the instructions to
include answers to those questions as an attachment to the current
Schedule R. Similarly, lines 13c-e (for multiemployer defined benefit
plans) and line 19 (asset allocation questions for large defined
benefit plans) of the Schedule R also are being implemented on a
transition basis for 2008 plan year annual reports. Filers will also be
directed in the instructions to include answers to these lines as an
attachment to the Schedule R.
The Agencies also changed the 2007 Form 5500 Annual Return/Report
instructions for short plan year filings (filings for years of less
than 12 months) to accommodate these PPA changes. Specifically, the
instructions to the Form 5500 Annual Return/Report historically have
advised filers that the due date for their Form 5500 for a plan year of
less than 12 months (short plan year) is the last day of the 7th month
after the short plan year ends. For purposes of determining the filing
deadline, the instructions state that a short plan year ends on the
date of the change in accounting period or upon the complete
distribution of assets of the plan in the case of terminated or merged
plans. The Agencies have permitted short plan year filers to use the
prior year's forms if the current year forms for the short plan year
are not available by the plan's filing due date. The Agencies expect
that, in some cases, filings for 2008 short plan years may be due
during 2008 and before the final regulations and instructions for the
Schedule SB or MB are available. Since the Schedule B will not be a
valid schedule for plan year 2008 filings, filers will not have the
option of using the 2007 Schedule B with a 2008 short plan year filing,
but will be required to wait until the 2008 Forms are available for
filing. The Agencies have indicated in the instructions for the 2007
Form 5500 Annual Return/Report that an automatic extension that will be
available for 2008 short plan year filings required to include a
Schedule SB or Schedule MB and/or a supplemental attachment to Schedule
R.
b. PPA-Required Simplified Reporting for Plans With Fewer Than 25
Participants
As noted in the Supplemental Notice, section 1103(b) of the PPA
requires a simplified report for plans with fewer than 25 participants
at the beginning of the plan year to be available for 2007 plan year
filings, i.e., filings for plan years beginning after December 31,
2006. The Supplemental Notice proposed to satisfy the simplified report
requirement for 2008 plan years, i.e., those beginning after December
31, 2007, by implementing the Short Form for 2008 plan year reports
under the new EFAST2 system. The Supplemental Notice explained the
Agencies' intention for the interim 2007 reporting year to give plans
covering fewer than 25 participants that met the conditions for being
eligible to file the Short Form 5500 the option of filing an
abbreviated version of the current Form 5500 Annual Return/Report for
small plan filers. The Supplemental Notice explained that the
abbreviated version would largely replicate, within the context of the
existing Form 5500 Annual Return/Report structure, the information that
would be required to be reported on the proposed Short Form 5500 by
allowing certain schedules to be excluded from the filing and requiring
only certain line items to be completed on some of the required
schedules. With the additional deferral of the electronic filing
requirement, this simplified reporting option for plans with fewer than
25 participants will be available for both the 2007 and 2008 plan year
filings.
For the 2007 and 2008 plan years, plans with fewer than 25
participants at the beginning of the plan year that meet the
eligibility requirements for the Short Form 5500, treating those
conditions as if they applied for 2007 and 2008 plan year filings, may
file the following as their annual return/report: (1) The entire Form
5500; (2) a Schedule A for any insurance contract for which a Schedule
A is required under current rules, completing lines A, B, C, D and the
insurance fee and commission information in Part I; (3) if the
reporting of actuarial information is required, the entire Schedule B
for the 2007 plan year, and the entire Schedule SB or MB (whichever is
applicable) for the 2008 plan year; (4) the entire Schedule I; (5)
Schedule R identifying information and Part II; and (6) the entire
Schedule SSA. The instructions to the 2007 Form 5500 Annual Return/
Report explain and 2008 Form 5500 Annual Return/Report will explain,
respectively, this simplified reporting option.
Some eligible small plan filers may want to wait until the
implementation of the Short Form 5500 for the 2009 plan year in order
to avoid having to make changes to their annual reporting systems and
procedures for 2007 and 2008 plan year filings and then having to
adjust them again to start filing the Short Form 5500 electronically
for the 2009 plan year. The above simplified reporting alternative,
accordingly, is available for plans that voluntarily choose to take
advantage of the option. Plans with fewer than 25 participants may
continue to file in accordance with the otherwise applicable small plan
filing rules for the 2007 and 2008 plan years. Small plans with 25 or
more participants that meet the eligibility requirements must wait
until the 2009 plan year to take advantage of the Short Form's
simplified reporting.
2. Short Form 5500
The Short Form 5500 was proposed as a new two-page form for small
plans (generally, plans with fewer than 100 participants) with secure
and easy to value investment portfolios. As set forth in greater detail
in the July 2006 Proposal, a plan would be eligible to file the Short
Form if the plan: (1) Covers fewer than 100 participants or would be
eligible to file as a small plan under the rule in 29 CFR 2520.103-
1(d); (2) is eligible for the small plan audit waiver under 29 CFR
2520.104-46 (but not by virtue of enhanced bonding); (3) holds no
employer securities; (4) has 100% of its assets in investments that
have a readily determinable fair market value; and (5) is not a
multiemployer plan.
Commenters on the July 2006 Proposal generally supported the
proposed Short Form 5500 as a way to simplify the annual reporting
requirements and reduce annual reporting burdens for small plans. The
Agencies, accordingly, have decided to adopt the Short Form 5500
largely as proposed with only minor technical revisions to the form and
the accompanying instructions.
Two commenters suggested that the Agencies relax the conditions for
plans to be eligible to file the Short Form 5500. The commenters noted
the requirement in the PPA (enacted after the July 2006 Proposal was
published) that Labor and the Department of the Treasury (Treasury)
jointly develop a simplified report for plans that cover fewer than 25
employees. One of the commenters suggested that Labor and Treasury use
the Short Form 5500 to meet this requirement by eliminating any other
eligibility conditions for plans covering fewer than 25 participants.
That commenter also suggested that the Short Form 5500 eligibility
requirement--that the plan hold 100% of its assets in secure, easy to
value investments--be modified so that it tracked the 95% ``qualifying
plan asset'' threshold that currently applies under the Department's
regulation at 29 CFR 2520.104-46 for small pension plans to be eligible
for the waiver of the general Title I requirement for employee benefit
plans to be audited annually by an independent qualified public
accountant (IQPA). Two other
[[Page 64735]]
commenters objected to the Short Form 5500 and reduced annual reporting
for small plans, asserting that small plans, especially those with
fewer than 25 participants, are more likely than plans of larger
companies to suffer from mismanagement of funds and improper
administration. Notwithstanding the PPA mandate to develop a simplified
annual report, the commenters urged requiring more detailed reporting
for small plans as a way of protecting against such abuses.
The Department of Labor and the Department of Treasury continue to
believe, as set forth in the Supplemental Notice, that the requirement
in the PPA to provide ``simplified'' reporting for plans with fewer
than 25 participants is satisfied by the simplified reporting scheme in
the July 2006 Proposal. In addition, the Department of Labor does not
view the PPA provision as a direction from Congress that was intended
to preclude the Department from determining that plans with fewer than
25 participants should meet conditions consistent with the purposes of
Title I and the PPA to be eligible to file the new simplified report.
To the contrary, the Department believes the PPA provision should be
read consistently with the authority granted the Department in ERISA
section 104(a)(2) and 104(a)(3) to create simplified reports for
pension and welfare plans, both of which provisions acknowledge that
the Department has such discretion. The Short Form 5500, as proposed,
was targeted to provide a simplified report for plans with fewer than
25 participants. Approximately 75% of all plans eligible to file the
Short Form 5500 cover fewer than 25 participants and approximately 95%
of plans with fewer than 25 participants are estimated to be eligible
to file the Short Form 5500. The decision to prohibit multiemployer
plans and plans that invest in employer securities from being eligible
to use the Short Form 5500 is consistent with the PPA's emphasis on
expanding the annual reporting requirements for multiemployer plans and
increasing transparency and participant control over employer
securities in individual account plans. As under the July 2006
Proposal, even those small plans not eligible to use the Short Form
5500 still would be able to avail themselves of the other simplified
reporting options available to small plans under the Form 5500 Annual
Return/Report. The commenter's suggestion to eliminate all of the Short
Form 5500 eligibility conditions for plans covering fewer than 25
employees therefore has not been adopted.
The suggestion to modify the condition that 100% of the plan's
assets are held in investments that have a readily determinable fair
market value also is not being adopted. As noted above, the Short Form
5500 conditions already require plans to satisfy the audit waiver
conditions in 29 CFR 2520.104-46 to be eligible to file the Short Form.
The condition in the audit waiver regulation that 95% of the plans
assets be ``qualifying plan assets,'' focuses on whether the assets are
held by a regulated financial institution, The Short Form 5500
condition regarding types of plan investments, in contrast, is based on
a premise that certain small plans, by virtue of all of their assets
being held by regulated financial institutions and having a readily
determinable fair market value, present reduced risks for their
participants and beneficiaries. Using any percentage measure for assets
with a readily determinable fair market value would create a risk that
hard to value assets would be materially undervalued in order to meet
the percentage threshold and result in plans with substantial holdings
in hard to value assets being eligible to file the Short Form 5500. The
Agencies continue to believe that the separate financial information
regarding hard to value investments on the Schedule I is important for
regulatory, enforcement, and disclosure purposes. The Agencies are not
changing this provision because of their concerns that allowing plans
with any hard to value assets to use abbreviated annual report filing
(i.e., the Short Form 5500) could compromise enforcement and research
needs of the Agencies and disclosure needs of participants and
beneficiaries in such plans.
3. Code Section 403(b) Plan Reporting
Under the July 2006 Proposal, the limited annual reporting options
currently available to Code section 403(b) plans would have been
eliminated so that Code section 403(b) plans would be subject to the
same annual reporting rules that apply to other ERISA-covered pension
plans. Two commenters representing employee benefit plan auditors and
administrative service providers were supportive of the Department's
proposal and agreed that requiring Code section 403(b) plans to comply
with the same annual reporting rules that applied to other ERISA
covered pension plans would improve transparency and accountability.
Other commenters representing 403(b) plan sponsors and insurance and
investment companies opposed the proposal. Those opposing the expanded
reporting requirement argued that compliance with the reporting
requirement would be both burdensome and costly given the fact that
most 403(b) plans are a composite of individual contracts issued to
employees by different 403(b) vendors without a central point for
administration and recordkeeping. The commenters claimed that there is
no record of abuse in the 403(b) plan area that supported the proposed
changes. Certain commenters also suggested that different annual
reporting rules for Code section 403(b) plans are justified by the fact
that the tax exempt employers that sponsor Code section 403(b) plans do
not have a tax incentive for sponsoring pension plans for their
employees and might be more likely to terminate plans or refuse to
sponsor plans based on concerns about administrative costs and burdens.
After evaluating the comments, the Department continues to believe
that subjecting Code section 403(b) plans to the same annual reporting
rules that apply to other ERISA covered pension plans is consistent
with the purposes of Title I of ERISA and the interests of covered
participants and beneficiaries. The approach to annual reporting by tax
sheltered annuity programs was premised historically on the conclusion
that they differed from ordinary pension or deferred compensation
plans. Code section 403(b) plans, which date back to 1958, were
originally less in the nature of a plan than of an arrangement under
which an employer purchased from an insurance company on behalf of an
employee an individual annuity contract that could be tailored to the
desires and financial means of the individual employee. Because
contributions were required to be invested only in annuity contracts or
in certain mutual fund custodial accounts, the Department had believed
that the regulatory supervision of insured annuity contracts and of
regulated investment companies provided much of the disclosure,
fiduciary and funding protection afforded by Title I of the Act. The
Department also had concluded that because section 403(b) programs may
be individually tailored, the reporting and disclosure provisions of
Title I could present substantial administrative difficulties for the
employer and for the Department. Finally, the Department viewed section
403(b) programs as similar to individual retirement account (IRA) based
plans that were granted an exemption from the annual reporting
requirements under Title I provided they met certain conditions.
[[Page 64736]]
As the IRS indicated in the preamble to the recently published
final regulations on Code section 403(b) plans (72 FR 41128, Jul. 26,
2007), various amendments to section 403(b) over the past 40 years have
diminished the extent to which the rules governing Code section 403(b)
plans differ from the rules governing other employer-based plans, such
as arrangements that include salary reduction contributions, i.e., Code
section 401(k) plans. The IRS's final Code section 403(b) regulations
would impose requirements involving the establishment of a more
centralized system of recordkeeping for all Code section 403(b) plans.
The establishment and growth since 1978 of 401(k) plans has made the
``individually tailored'' character of Code section 403(b) plans less
distinctive. Section 401(k) plans are often structured as participant
directed with multiple investment options offered by separate
investment providers, and many plans include brokerage accounts as a
way of allowing employees to further tailor the plan to their
individual investment objectives and financial means. Developments in
the Code section 403(b) plan market have also raised questions about
whether regulatory supervision of Code section 403(b) plan vendors
under insurance and securities laws provides much of the disclosure,
fiduciary, and funding protections afforded by Title I of the Act. In
the fiscal years 2002 through 2006, the Department found violations in
78 percent of its investigations of Code section 403(b) plans. Although
the predominant issue in these investigations was delinquent employee
salary contributions, investigations of Code section 403(b) plans also
revealed delinquent employer contributions, imprudence, prohibited uses
of assets, and reporting and disclosure violations. The high incidence
of improper handling of employee contributions suggests a potentially
broader laxity in fiduciary oversight. There are also reports that
governmental entities that sponsor Code section 403(b) plans (which
generally would be excluded from ERISA as governmental plans) are
concerned about undisclosed fees, penalties, and restrictions in their
Code section 403(b) plans and are making demands for additional
disclosures. See, e.g., California Assembly Bill 2506, signed Sept. 29,
2002 (codified at Cal. Education Code secs. 25100-25115).
The Department believes that the annual report requirements,
including an audit by an IQPA, provide important oversight of the Code
section 403(b) plan's internal control structure and overall
operations. The Department believes that preparing the financial
statements and schedules as part of the annual report in compliance
with the Department's requirements for reporting and disclosure under
ERISA provides participants with greater assurance that the plan
administrator or other authorized parties have properly monitored the
financial condition and operation of the plan. The impact of having to
meet the same annual reporting requirements applicable to other ERISA-
covered plans would be substantially less burdensome for small tax-
exempt employers, which generally should be eligible for the small plan
audit waiver and for filing the Short Form 5500.
While the new annual report requirements may result in additional
costs to a Code section 403(b) plan, these reporting requirements would
only apply to Code section 403(b) plans that are subject to Title I of
ERISA and would subject those plans only to the same annual reporting
requirements that apply to other ERISA-covered pension plans. In such
cases, the administration and management of the Code section 403(b)
plan have already been subject to ERISA's general fiduciary
obligations. Such plans should, therefore, already have an
administrative structure in place to ensure compliance with various
Title I requirements, such as having a written plan document,
furnishing summary plan descriptions and other ERISA required
disclosures to participants and beneficiaries, and maintaining an
adequate recordkeeping system so that the plan fiduciaries can
prudently manage the plan and monitor plan service providers. In the
Department's view, the process of preparing an annual report reinforces
a recordkeeping and monitoring discipline on plan officials that
facilitates better fiduciary compliance. In that regard, the Department
does not believe that it would be helpful to adopt the suggestion by
one commenter to have Code section 403(b) plans answer only a single or
limited number of questions focused just on timely transmission of
employee salary reduction contributions to the plan. The Department
does not believe that continuing a general exemption from the audit
requirement for Code section 403(b) plans subject to Title I annual
reporting requirements is appropriate.
As noted in the preamble to the July 2006 Proposal, small Code
section 403(b) plans (generally covering fewer than 100 participants)
should be able to meet the conditions for being exempt from the audit
requirement and be eligible to file the proposed Short Form 5500.\7\
Thus, relative to the current requirements, the final rule provides
significant annual reporting and audit relief for small tax exempt
employers. In that regard, in the Department's view, Code section
403(b) plans that were eligible to file as a small plan under 29 CFR
2520.103-1(d) in the previous year and that have participant counts of
less than 121 at the beginning of the 2009 plan year can file as small
plans under the new filing rules.
---------------------------------------------------------------------------
\7\ One commenter expressed concern that some Code section
403(b) investments might not meet the Short Form 5500 eligibility
requirement that 100% of the plan's assets be held in investments
that have a readily determinable fair market value. The instructions
published with the July 2006 Proposal specifically provided that
investments in mutual fund shares and insurance contracts for which
valuation information is provided by the insurer at least annually
were assets that had a ``readily determinable fair market value''
for purposes of the Short Form 5500 eligibility conditions. Those
instructions are carried over into the instructions to the final
Short Form 5500.
---------------------------------------------------------------------------
One commenter that supported the proposal to apply generally
applicable annual reporting rules to Code section 403(b) plans
suggested that interim relief may be needed because auditors may refuse
to take on initial engagements because records from prior years may not
be adequate for current year audit purposes. Although Code section
403(b) plans have not yet been subject to an audit requirement as part
of the annual reporting process, as noted above, fiduciaries of such
plans must keep records under ERISA section 107 to verify that they are
in fact eligible to file as Code section 403(b) plans and have a
general fiduciary obligation to keep adequate records to monitor the
plan and ensure compliance with the fiduciary and other substantive
requirements of Title I of ERISA.\8\
[[Page 64737]]
Further, Code section 403(b) plans are required to maintain various
records in order to comply with Code requirements including, for
example, discrimination testing, required distributions and compliance
with maximum contribution limitations. Despite the existing
recordkeeping requirements, the Department recognizes that auditors may
face difficulties in providing an unqualified opinion in their initial
audits of Code section 403(b) plans. In that regard, the final forms
changes defer the reporting year to which this requirement applies for
an additional year from that in the proposal. This Notice is thus being
published over a year before the first plan year for which plan audits
would be required, and over two years before the plan audits themselves
would likely be commenced. In light of the extended lead time the
publication date gives plans to make changes to their recordkeeping
practices and make certain they have access to the necessary records in
anticipation of the audit for the 2009 plan year, in the Department's
view, it would be premature at this point to announce general
transitional relief from the audit requirement. The Department will,
however, remain open to reconsidering the issue to the extent
developments suggest that a transitional enforcement policy or other
transitional relief would be appropriate to address problems caused by
lack of familiarity with the audit process or is needed to facilitate a
smoother transition to the new annual reporting regime by Code section
403(b) plans.
---------------------------------------------------------------------------
\8\ One commenter argued that Code section 403(b) plans covered
by ERISA have no ERISA section 107 recordkeeping obligations under
Title I because they file under an alternative method of compliance
under section 110 of ERISA, not under a simplified report or
exemption under section 104 of ERISA, and ERISA section 107 only
requires administrators to keep records necessary to verify the
information actually filed on the Form 5500 when it is filed as an
alternative method of compliance. ERISA section 107 provides that
``[e]very person subject to a simplified requirement to file any
report or to certify any information therefor under this title or
who would be subject to such a requirement but for an exemption or
simplified reporting requirement under section 104(a)(2) or (3) of
this title, shall maintain records on the matters of which
disclosure is required which will provide in sufficient detail the
necessary basic information and data from which the documents thus
required may be verified, explained, or clarified, and checked for
accuracy and completeness. . . .'' Accepting the commenter's
argument would lead to the anomalous result that large Code section
403(b) plans would have very limited recordkeeping obligations under
ERISA section 107, but plans exempt from any Form 5500 filing
requirement would be required to keep records necessary to verify
the information that would be required to be filed under section 103
of ERISA. In any event, all Code section 403(b) plans filing a Form
5500 under the limited reporting provisions available to Code
section 403(b) plans would have to keep records under ERISA section
107 to verify that they are in fact a pension plan or arrangement
using a tax deferred annuity arrangement under Code section
403(b)(1) and/or a custodial account for regulated investment
company stock under Code section 403(b)(7) as the sole funding
vehicle for providing pension benefits and would have a general
fiduciary obligation to keep records adequate to ensure compliance
with the fiduciary and other substantive requirements in Title I of
ERISA.
---------------------------------------------------------------------------
A few commenters contended that the ``universal availability''
requirement applicable to Code section 403(b) plans under the Internal
Revenue Code and Treasury Department regulations will unfairly result
in Code section 403(b) plans with only a small number of active
participants being subject to the large plan audit requirement because
all eligible employees are counted as covered participants. The
Department notes that Code section 401(k) plans are currently subject
to a similar rule where all employees who are eligible to make salary
reduction contributions are required to be counted as participants
regardless of whether they in fact make any contributions. The
Department also expects that, like Code section 401(k) plans, a
substantial percentage of large Code section 403(b) plans should be
eligible for limited relief from the full audit requirement by taking
advantage of the limited scope audit option available under the
Department's regulation at 29 CFR 2520.103-8.
Some additional technical changes were made to the final forms to
make it clear that certain annual reporting options available to Code
section 401(k) plans are also available to Code section 403(b) plans.
Specifically, the Schedule H instructions have been modified to provide
for aggregate reporting on Lines 4i (Schedule of Assets Held for
Investment Purposes) and Line 4j (Schedule of Reportable Transactions)
for individual annuity contracts and custodial accounts in Code section
403(b) plans as is currently permitted for participant-directed
accounts in Code section 401(k) plans. In addition, the Schedule A
instructions have been expanded to make clear that the current rule
allowing filers to report a group of individual policies issued by the
same insurer on a single Schedule A would apply for Code section 403(b)
individual annuity contracts. At the request of one commenter, Line 9
of the Form 5500 has been changed to make clear that Code section
403(b) plans that are funded with and pay benefits through Code section
403(b)(7) ``custodial accounts'' should check ``trust'' for both
funding and benefit arrangement.
Finally, in light of the additional annual reporting obligations
associated with maintaining a Code section 403(b) plan that is covered
by Title I, several commenters stated that more guidance was necessary
on the Department's safe harbor regulation at 29 CFR 2510.3-2(f) to
assist plans in determining whether they were covered by Title I of
ERISA. The commenters stated that this guidance was especially
important in light of Treasury's then anticipated issuance of final
regulations at 72 FR 41128, TD 9340 reflecting legislative changes made
to Code section 403(b) since the existing regulations were adopted in
1964 and incorporating interpretive positions that Treasury has taken
in other guidance on Code section 403(b). The Department's safe harbor
at 29 CFR 2510.3-2(f) states that a program for the purchase of an
annuity contract or the establishment of a custodial account in
accordance with provisions set forth in Code section 403(b) and funded
solely through salary reduction agreements or agreements to forego an
increase in salary, are not ``established or maintained'' by an
employer under section 3(2) of ERISA, and, therefore, are not employee
pension benefit plans subject to Title I, provided that certain factors
are present. The Department agrees that it is important for Code
section 403(b) plans to be able to determine whether they are covered
by Title I for annual reporting and other ERISA compliance purposes.
Thus, the Department issued guidance contemporaneously with Treasury's
issuance of its revised regulations under Code section 403(b) on the
continued availability of the safe harbor at 29 CFR 2510.3-2(f) and the
interaction of the Department's safe harbor and the provisions of the
Treasury regulations addressing employer tax compliance obligations in
the ongoing operation of a Code section 403(b) arrangement. See FAB
2007-02 (July 24, 2007) (available on the Internet at http://www.dol.gov/ebsa/regs/fabmain.html
).
4. Schedules SB and MB (Pension Plan Actuarial Information)
Draft Schedules SB and MB were posted on the Department's Web site
in conjunction with the Supplemental Notice. Instructions for these
draft Schedules were not posted nor are they included in this Notice
because their development hinges on guidance to be issued by the IRS
and/or the PBGC implementing the PPA requirements underlying the Form
5500 Annual Return/Report data elements. Specific guidance regarding
the details required in Schedule SB and Schedule MB will be provided in
future guidance and will be included in the instructions.
The Agencies received no comments related to the new Schedule MB
and multiple comments from one commenter on Schedule SB. That commenter
suggested that Line 4a be eliminated because it is identical to the
entry in the second column of Line 3d. The Agencies note that the
amount reported on Line 4a will not be the same as the amount reported
in Line 3d and that this will be made clear in the instructions.
This commenter also suggested that item 6 be expanded to have one
line for reporting regular target normal cost and another line for
reporting at-risk target normal cost. The Agencies acknowledge that
some plans will need to calculate both amounts in order to determine
target normal cost, but conclude that it is not necessary to require
that these interim calculations be reported. Guidance regarding the
details of this calculation will be included in the instructions.
This commenter suggested that the words ``not less than zero'' be
added to
[[Page 64738]]
the end of the parenthetical definition for Line 30 on the Schedule SB.
The Agencies concluded that this change is not necessary. Guidance
regarding Line 30 will be included in the instructions.
This commenter noted that the definitions for Lines 7 and 8 refer
to Lines 13 and 35 from the prior year, but that these definitions will
not be valid for 2008 unless the 2007 Schedule B is changed to include
Lines 13 and 35 as defined in the 2008 Schedule SB. The Agencies note
that Lines 13 and 35 will not be included on the 2007 Schedule B. The
Schedule SB was designed to reflect various PPA reporting and
disclosure provisions (generally effective for 2008 and subsequent
years). Information on ``look back'' rules applicable for completing
the questions on the Schedule SB will be included in the instructions.
5. Schedule C (Service Provider Information)
The Department believes that an annual review of plan fees and
expenses as part of the annual reporting process is part of a plan
fiduciary's on-going obligation to monitor service provider
arrangements with the plan. Commenters generally supported the goals of
the proposed changes to the Schedule C, as stated in the proposal, of
increasing transparency regarding fees and expenses paid by employee
benefit plans and ensuring that plan officials obtain the information
they need to assess the compensation paid for services rendered to the
plan, taking into account revenue-sharing arrangements among plan
service providers and potential conflicts of interests.
Commenters representing insurance companies, banks, and other
financial institutions, however, while generally supporting fee
transparency and applauding the Department's initiatives in this area,
raised concerns that the proposed Schedule C reporting scheme for
indirect compensation was more extensive than necessary. They asserted
that the proposed changes could result in duplicative, misleading, and
confusing reporting. The commenters also argued that the proposed
changes, if not narrowed, would impose significant administrative costs
on service providers to track and disclose information on indirect
compensation, which costs they likely would pass on to their employee
benefit plan clients. These commenters suggested that reporting of
indirect compensation, as proposed, should be narrowed in various ways:
(1) Eliminate or narrow reporting of ``float'' income; (2) postpone any
requirement to report ``soft dollars'' until after the Securities and
Exchange Commission (SEC), as the primary regulator of soft dollar
compensation, addresses the subject as it applies to investors
generally; (3) except from reporting revenue sharing payments among
affiliates and by other bundled service providers to entities that the
bundled provider engages to provide services; (4) retain the current
rules under which brokerage commissions are not required to be reported
unless the broker is granted some discretion; (5) define ``service
providers'' required to be listed in the Schedule C as limited to
persons with direct service relationships with the plan and exclude
from Schedule C reporting payments to ``subcontractors'' based on the
premise that subcontractors are merely assisting the direct service
provider in fulfilling its contractual obligations and are not
providing services to the plan; (6) confirm that insurers and
investment providers are not required to be listed as service providers
on Schedule C solely as a result of the plan's purchase of the
insurance contract or investment with the investment provider; and (7)
integrate the annual reporting requirement into other regulatory
disclosure requirements regarding fee and expense disclosure to avoid
duplicative and confusing disclosure requirements.
Two individual commenters suggested that the Schedule C should be
completed by small plans as well as large plans and that the $5,000
reporting threshold for listing a service provider on the Schedule C
should be lowered or eliminated. Another commenter suggested that, if
full Schedule C reporting was not expanded to small plans, investment-
related fees and expenses should be reported separately in a similar
manner as administrative service provider expenses under the July 2006
Proposal which called for administrative service provider expenses paid
by the plan to be reported as an aggregate line item on Schedule I and
the Short Form.
As noted in the July 2006 Proposal, issues relating to the
appropriate manner and scope of the reporting of service provider
compensation on the Schedule C have been raised by the ERISA Advisory
Council and the Government Accountability Office, as well as by Form
5500 Annual Return/Report filers and plan service providers. The
Department is working on a separate regulation setting forth the
standards applicable to the exemption under ERISA section 408(b)(2) for
contracting or making reasonable arrangements with a party in interest
for services. See 72 FR 22845. That regulation is intended to eliminate
the current uncertainty as to the information relating to services and
fees that plan fiduciaries must obtain and service providers must
furnish for purposes of determining whether a contract for services to
be rendered to a plan is reasonable. Another rulemaking initiative on
the Department's regulatory agenda involves review of participant-level
disclosure, including the regulation governing ERISA section 404(c)
plans (29 CFR 2550.404c-1), to ensure that participants and
beneficiaries in individual account plans are provided the information
they need, including information about fees and expenses, to make
informed investment decisions. Id. Other federal agencies, for example
the SEC, are also focusing on efforts to give investors, including
employee benefit plans, better information about the actual amount they
have paid investment fund managers during a given period.
Against this backdrop, and inasmuch as plan administrative costs
are being passed on to plan participants with increasing frequency, it
is critical to ensure that the benefits of any new annual reporting
requirement outweigh the attendant compliance costs--costs that may
ultimately reduce retirement savings. The Schedule C requirements
historically have been limited to large plans that are required to file
the Form 5500 Annual Return/Report and have not covered the broader
class of plans covered by the Department's other fee transparency
initiatives. Considered in context with other fee disclosure
initiatives at the Department and elsewhere that are more tailored to
the concerns expressed by GAO and the ERISA Advisory Council on changes
needed to provide 401(k) plan participants better information on fees,
particularly investment fees indirectly incurred by participants
directing the investment of assets in their individual 401(k) plan
accounts, the Department does not believe expanding the Schedule C
annual reporting requirements to small pension plans would be
consistent with the direction from Congress in the PPA for the
Department to simplify the annual report for plans sponsored by small
businesses.
The Department continues to believe that it is appropriate to
modify the Schedule C reporting requirements for large plans in an
effort both to clarify the reporting requirements and to ensure that
the Form 5500 Annual Return/Report serves a role in helping plan
officials obtain the information they need to assess the reasonableness
[[Page 64739]]
of the compensation paid for services rendered to the plan, taking into
account revenue sharing and other financial relationships or
arrangements and potential conflicts of interest that might affect the
quality of those services. After having carefully reviewed the public
comments on the Schedule C proposal, the Schedule C is being adopted
largely as proposed, but some revisions are being made to the proposed
requirements. The changes are intended to reduce the administrative
burdens on plans and plan service providers and clarify the reporting
requirements without compromising the proposal's overall objectives.
a. Indirect Compensation Reporting on Schedule C
Reportable compensation under the final Schedule C revisions
continues to be defined to include money and any other thing of value
(for example, gifts, awards, trips) received directly or indirectly
from the plan (including fees charged as a percentage of assets and
deducted from investment returns) for services rendered to the plan.
The Department does not agree with the commenters who argued that only
those persons with ``direct service relationships'' with the plan
should be treated as providing services to the plan for Schedule C
reporting purposes. The Department believes that such a conclusion
would be inconsistent even with the current reporting requirements in
the Schedule C. Under current reporting rules, reportable indirect
compensation expressly 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.'' Nothing in the proposal was intended to restrict or
diminish the existing requirement to report such finders' fees or
commissions. Rather, the proposal was designed to expand indirect
compensation reporting requirements. The Department also believes that
adopting the commenters' suggestion would undermine the objective of
improving disclosure of fee and compensation information because it is
not consistent with the reality of the employee benefit plan
marketplace where the nature and complexity of the business and
investment environment in which plans operate has changed the ways in
which plans obtain and pay for administrative, investment, and other
services. Although the Department agrees that an investment of plan
assets or the purchase of insurance is not, in and of itself,
reportable service provider compensation for purposes of the Schedule
C, in the Department's view, persons that provide investment
management, recordkeeping, participant communication, and other
services to the plan as part of a transaction with the plan should be
treated as providing services to the plan or its participants for
purposes of Schedule C reporting. Thus, under the final Schedule C
revisions, and subject to the alternative reporting option described
below, such persons would be required to be identified in Part I if
they received, directly or indirectly, $5000 or more in reportable
compensation for a transaction or service involving the plan.
Several commenters suggested that a payment be reportable on
Schedule C only if either the service provider's eligibility for the
payment or the amount of the payment is based on a transaction directly
involving assets of the plan. The commenters argued that such a test
would be consistent with conflict of interest rule in ERISA section
406(b)(3), which prohibits receipts by plan fiduciaries of
consideration for their own personal account from any party dealing
with a plan ``in connection with'' transactions involving plan assets.
The Department does not agree that the standard for Schedule C
reporting should be narrowed to parallel the prohibited transaction
standard in ERISA section 406(b)(3). Unlike the prohibited transaction
provision in 406(b)(3), the Schedule C revisions were not intended to
be limited to receipts by plan fiduciaries or to identifying
impermissible conflicts of interest. The Schedule C reporting of
indirect compensation also is not limited to only those circumstances
where a plan fiduciary affirmatively chooses the indirect service
providers. Rather, one of the goals of the Schedule C changes is to
improve fee disclosure to plan fiduciaries, especially where they do
not have a role in determining the compensation paid to parties that
are receiving fees for a transaction or service involving the plan.
Schedule C reporting arises in part from ERISA section 103(c)(3), which
requires information in the annual report regarding ``each person''
(not limited to just fiduciaries) who rendered services to the plan or
who had transactions with the plan who received, directly or
indirectly, compensation from the plan during the year for services
rendered to the plan or its participants. Further, ERISA section
103(c)(5) expressly provides that the administrator shall furnish as
part of the annual report ``[s]uch financial and actuarial
information'' as the ``Secretary may find necessary or appropriate.''
In the Department's view, the prohibited transaction standard in ERISA
section 406(a)(1)(C)--transactions that constitute a ``direct or
indirect'' furnishing of goods, services, or facilities to the plan--is
generally a more suitable analog for Schedule C reporting. Thus, in the
Department's view, the Schedule C reporting requirement should
generally capture both persons who receive direct or indirect
compensation and persons who provide services directly or indirectly to
the plan.
The Department nonetheless agrees that additional guidance on
certain areas of concern raised by commenters would establish useful
compliance guides for plan administrators and plan service providers.
As was noted in the July 2006 Proposal, Schedule C was intended to
capture information on compensation received by persons providing
services, and not information on benefit payments to participants and
beneficiaries. Where fully insured group health benefits, or similarly
fully insured benefits under a plan, are purchased from and guaranteed
by a licensed insurance company, insurance service, or other similar
organization, and where information regarding that contract is reported
on the Schedule A, compensation paid by the insurance company from its
general assets to affiliates or third parties for administrative
activities necessary for the insurer to satisfy its contractual
obligation to provide benefits is not required to be treated as
reportable service provider compensation for purposes of the Schedule
C. Insurance investment contracts are not eligible for this exception.
As described below in the discussion of the Schedule A (Insurance
Information), a similar exclusion is being adopted in defining the
scope of insurance fees and commissions that must be separately
reported on the Schedule A. In determining whether such compensation is
excludable from the Schedule C, the Department would look to whether
the administrative services are necessary for the insurer to satisfy
its contractual obligation to provide benefits under the plan and are
not services incidental to the sale or renewal of a policy, whether
payments by the insurer are out of its general assets to third parties
without any other direct or indirect charge to the plan other than the
policy premium, are made pursuant to a contract or written
understanding to provide the services, and whether the amount of the
compensation paid by the insurer is
[[Page 64740]]
reasonable in light of the value of the services provided.
Under the proposal, Schedule C reportable compensation included
brokerage commissions and fees directly or indirectly charged to the
plan on purchase, sale, and exchange transactions regardless of whether
the broker is granted discretion. Commenters urged retaining the
current limitation under which such compensation is reported on the
Schedule C only for brokers granted discretion. The Department
continues to believe that brokerage fees and commissions may constitute
a significant part of a plan's annual expenses and that continuing the
current exemption from the Schedule C reporting for such expenses is
not appropriate. A review of expenses as part of the annual reporting
process is part of a plan fiduciary's on-going obligation to monitor
service provider arrangements with the plan. Requiring the reporting of
such brokerage commissions and fees should emphasize and reinforce that
monitoring obligation. The Department understands that information on
brokerage fees and commissions may be provided to the plan by parties
other than the broker receiving the fee or commission. For example, a
number of commenters indicated that in many cases the broker will not
know the party on whose behalf a brokerage transaction is being
executed because the instructions to execute trades are often provided
by investment managers who control investment portfolios for multiple
ERISA plans, non-ERISA plans, and non-plan clients. The commenters
asserted that it may be very difficult for the broker to identify fees
and commissions it receives from ERISA plan transactions, much less
identify fees and commissions it receives on transactions involving a
particular ERISA plan. The Department notes that the plan administrator
is the party with the obligation to complete the Schedule C. Further,
the Schedule C does not require that information on reportable fees and
commissions necessarily be furnished to the administrator by the party
receiving the fee or commission. Rather, in the situation described by
the commenters, the investment manager should have information on which
transactions are being executed for which clients and should have
information on the fees and commissions it is being charged for those
transactions. In such a case, the investment manager, rather than the
broker, may be the appropriate party to provide the plan administrator
with information on those service provider fees and commissions.
Many of the comments raising concerns about the difficulties and
burdens of reporting indirect compensation focused on ``float''
revenue; \9\ securities brokerage commissions (including soft dollar
commissions\10\); and service fees charged against plan investments and
reflected in the net value of the plan's investment in mutual funds,
bank investment funds, and insurance company investment contracts.
According to the GAO, see, e.g., ``Private Pensions: Changes Needed To
Provide 401(k) Plan Participants and the Department of Labor Better
Information on Fees'' (GAO 07-21, Nov. 2006), these investment-related
fees indirectly paid by plans and plan participants account for the
largest portion of total plan fees regardless of plan size. Services
provided for these fees can include investment management (e.g.,
selecting and managing the securities included in a mutual fund);
consulting and providing financial advice (recommending vendors for
investment options or other services); custodial or trustee services
for plan assets; and shareholder services (such as telephone or web-
based customer services for participants). Record-keeping fees were
identified as generally constituting the second-largest portion of
these indirect fees. Record-keeping fees are usually paid to a service
provider to set up and maintain the plan. These fees cover activities
such as enrolling plan participants, processing participant investment
selections, preparing and mailing account statements, and other related
administrative activities.
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\9\ Financial service providers (e.g., banks and trust
companies) sometimes place ERISA plan assets in a general account
for short periods of time in order to facilitate certain
transactions, such as while waiting for investment instructions from
the plan's fiduciaries or in order to make a distribution or other
disbursement. The period that begins when the plan money is
deposited in the general account, and ends when the investment
instructions are executed or the disbursement check clears, is known
as the ``float.'' During this float period, the money often is
invested in conservative, short-term investments. In some cases, the
ERISA plan is credited with the earnings on these investments. In
others, the financial service provider keeps the earnings as part of
its compensation.
\10\ Soft dollars include research or other products or
services, other than execution, received from a broker-dealer or
other third party in connection with securities transactions.
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The commenters indicated that the burden and complexity of
reporting investment-related fees is due in large part to the fact that
a substantial majority of retirement plan service providers maintain
plan records and investment information at an omnibus account level.
Certain commenters described omnibus accounting as ``best practice'' in
the industry. They suggested that efficiencies in data exchanges and
settlement transactions between funds and retirement plan record
keepers generated by omnibus accounting are used to reduce plan service
costs. These savings were described as based in part upon the service
provider maintaining omnibus trading accounts with investment-related
service compensation based upon a percentage of the total assets in an
investment fund. A commenter representing the mutual fund industry
asserted that it would be extremely difficult to parse out by plan (in
dollars) specific components of a fund's expenses for purposes of Form
5500 reporting. The commenter suggested that the data systems overhaul
that would be needed to track this information would be prohibitively
expensive. Other commenters suggested that, although it may be possible
with current data systems to generate an estimate of the amount of
investment-related fees reflected in the periodic net asset valuation
of a plan's investment on a case-by-case basis, systematically
performing such a task each year for each investing plan would be
difficult given the variation in omnibus account investment fees and
the pervasiveness of their use as a means of compensating service
providers for an array of investment-related services.
In a similar vein, several commenters expressed concern about the
Schedule C reporting requirements in the case of revenue sharing among
members of a bundled service arrangement (including, in particular,
revenue sharing among affiliates from investment-related fees charged
at the omnibus account level). The commenters explained that bundled
service arrangements include arrangements where the plan hires one
company to provide, either directly or through affiliated entities or
unaffiliated subcontractors, an array of services rather than
purchasing the services on an individual basis. In some typical
arrangements, a bundle of services is included as part of an investment
transaction and the service providers are paid out of investment
management and other charges levied on an investment fund comprised of
many ERISA plans, other plans, and, in some cases, non-plan investors.
Several commenters asked that the final Schedule C revisions confirm
that payments received in such a bundled arrangement by a service
provider from an affiliate not be separately reportable on Schedule C.
The commenters argued
[[Page 64741]]
that separate reporting was not necessary to identify possible
conflicts of interest because the self-interest such a service provider
has in its affiliate should be readily apparent to the plan fiduciary
evaluating an investment in the bundled arrangement or any advice or
recommendation by that service provider relating to its affiliate. The
commenters also argued that separate disclosures on revenue sharing
among affiliates are not necessary where the total compensation
received by the affiliated group is to be reported. The commenters
argued that allocation of revenues among affiliates may not be based on
the value of services provided by the respective affiliates to
investing plans, but instead may be driven by tax accounting, cash flow
or other internal business purposes of the affiliate group. They also
argued that, although they could attempt to allocate a cost to each
service in the bundled, the annual report does not in other cases
require service providers to report their cost, as opposed to the
charges paid by the plan. The commenters also argued that reporting
revenue sharing among affiliates would create a confusing distinction
between entities that provide services using employees in multiple
divisions of one company and entities that use several separate
subsidiaries to provide the services. One of the commenters suggested
that if multiple affiliates within an organizational group provided
services to a plan, it should be sufficient to identify in Part I of
Schedule C the organization together with its participating affiliates
and report compensation on an aggregate basis.
Other commenters representing ``unbundled'' or ``open
architecture'' investment providers asserted that allowing aggregate
reporting for bundled/affiliated providers, without having a parallel
rule for unbundled providers would generate misleading information for
plan administrators. The commenters represented that unbundled
investment service arrangements use the same basic omnibus accounting
and omnibus account fee arrangements as bundled providers. In the
unbundled context, revenue sharing is used to compensate unaffiliated
entities providing the same recordkeeping and shareholder services
provided by affiliates in a bundled provider arrangement. They pointed
out that technological improvements in information management systems
and data exchange between investment funds and retirement plan record
keepers have given unbundled providers the ability to offer cost and
fee structures competitive to those of bundled providers. They also
argue that unbundled arrangements give plans access to a wider range of
unaffiliated investment vehicles than is typically offered by bundled
providers.
Representatives of the ``unbundled'' service providers claim that,
just like the bundled providers, the parties providing sales,
recordkeeping, participant communication, and other services are often
paid indirectly from charges levied against the investment funds in
which the plan accounts are invested. They read the Schedule C proposal
as requiring, in the case of bundled providers, reporting of a single
sum equal to the total compensation, including investment management
and other asset-based fees, paid by the plan without reporting the
allocation of those charges to affiliated service providers in the
bundle. In comparison, they read the proposal to require that the plan
report, in the ``unbundled'' structure, both the total investment
management and other asset-based fees as well as report allocations
from those fees to the unaffiliated service providers. The commenters
suggested, therefore, that, although an unbundled arrangement may
provide the same services as a bundled arrangement and the various
service providers may be paid out of the same investment management and
omnibus asset-based charges as in a bundled arrangement, the Schedule C
reporting could make it appear as if the unbundled arrangement included
more fees.
The Department has decided to revise the Schedule C reporting
requirement in an effort to address both the concerns regarding the
burden and expense of reporting plan specific components of omnibus
asset-based charges and concerns over disparate reporting treatment of
affiliated service provider groups and unaffiliated providers using
essentially the same indirect compensation arrangements. In that
regard, the Department notes that even commenters generally supporting
the Schedule C proposal urged the Department to provide flexibility,
consistent with the spirit of the proposed Schedule C changes, in
defining acceptable methods of reporting fee and expense information
and allocating the fees and expenses for specific service provider
compensation to individual plans.
Thus, the final Schedule C revisions include a new definition of
what would constitute a bundled arrangement for Schedule C reporting
purposes. In the case of such bundled arrangements, although revenue
sharing within the bundled group generally does not need to be
separately reported, the person or persons in the bundle receiving
separate fees charged against the 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, subject to the
alternative reporting option described below, be treated as receiving
separate reportable compensation for Schedule C purposes. Also, and
subject to the alternative reporting option described below, any person
in the bundle who is a fiduciary to the plan or provides one or more of
the following services to the plan contract administrator, consulting,
investment advisory (plan or participants), investment management,
securities brokerage, or recordkeeping--receiving amounts as
commissions (including finders' fees), soft dollars or other
nonmonetary compensation, float revenue, or transaction-based charges
(e.g., brokerage commissions) must be separately reported on the
Schedule C if their total reportable compensation equals or exceeds
$5,000. The Department believes that having to disclose the receipt of
separate fees actually charged against the plan's investment would not
require service providers to disclose information legitimately
classified as proprietary or confidential. Further, in the case of
commissions, soft dollars, finders' fees, float revenue, and
transaction-based charges paid to affiliates, the Department believes
such charges are just as likely for both affiliate groups and
unaffiliated providers to be relevant to the plan fiduciary in
evaluating possible conflicts of interest.
Except as described above, the Department continues to believe that
it is generally sufficient for Schedule C reporting purposes to treat
an affiliate group as a single person and identify that affiliate group
in Part I of the Schedule C as the party receiving compensation from
the plan for rendering services to the plan. The Department emphasizes,
however, that if one or more of the affiliates or a member of a bundled
arrangement received compensation from sources outside the affiliate
group or bundled arrangement in connection with the investment
transaction with the plan or services provided to the plan, that
compensation also would have to be included as part of the reportable
compensation received in determining Schedule C reporting requirements.
For purposes of this Schedule C reporting rule, an ``affiliate'' of
a person includes any person, directly or
[[Page 64742]]
indirectly, through one or more intermediaries, controlling, controlled
by, or under common control with the person. The instructions for the
Schedule C have been revised to provide that ``control,'' with respect
to a person other than an individual, means the ability to exercise a
controlling influence over the management or policies of such person.
In attempting to strike a balance between the costs and benefits of
improved disclosure of investment-related fees and expenses, the
Department believes some of the concerns regarding the burden and
complexity of allocating fees charged in an omnibus account structure
can be addressed by further modifying the Schedule C requirements so
they rely on disclosures regarding those fees resulting from other
regulations or business practices to the extent those disclosures meet
the objectives underlying the Department's Schedule C proposal. The
final Schedule C revisions thus include an alternative reporting option
for ``eligible indirect compensation.'' To constitute eligible indirect
compensation for this purpose, the compensation has to be of a certain
type and the plan must have received certain disclosures. The eligible
compensation types are compensation not paid directly by the plan or
plan sponsor but received by plan service providers from omnibus level
fees charged to investment funds in which the plan invests where the
charges are reflected in the value of the investment or return on
investment of the participating plan or its participants and for:
distribution, investment management, recordkeeping or shareholder
services; commissions and finder's fees paid to persons providing
direct or indirect services to the participating plans; float revenue;
securities brokerage commissions and other transaction-based fees
(whether or not they are capitalized as investment costs); and ``soft
dollar'' revenue. For the alternative reporting option to be available,
in addition to being within that class of investment fees, the plan
administrator must also be furnished written materials, including in
electronic form, that disclose the existence of the indirect
compensation; the services provided for the indirect compensation or
the purpose or purposes for the payment of the indirect compensation;
the amount (or estimate) of the compensation or a description of the
formula used to calculate or determine the compensation; and the
identity of the party or parties paying and receiving the compensation.
The Department believes that any written disclosure, whether
regulatory, contractual, or voluntary, could be relied upon so long as
all of the elements of the disclosure were provided to the plan
administrator. Further, the necessary information could be provided to
the plan administrator in separate disclosures from multiple parties.
In the case of service providers who received only eligible
indirect compensation, the plan administrator would be able to check a
box on the Schedule C to indicate that there were such service
providers and that the plan had received the appropriate disclosures,
and then identify on the Schedule C each person from whom the plan
administrator received the necessary disclosures regarding the eligible
indirect compensation. For example, 12b-1 fees received by a party
providing recordkeeping services to a plan would not have to be
separately reported on the Schedule C if the disclosures in the mutual
fund prospectus together with disclosures in the service contract
advised the plan administrator of the fact that the 12b-1 fees were
being received, what the fees were paid for, the amount or estimate of
the fees received or the formula used to calculate the amount of the
fees received, and the party from whom the recordkeeper was receiving
the fees. Similarly, ``soft dollars'' received by an investment manager
in the form of research or other permissible services in connection
with securities trades on behalf of plan clients need not be separately
reported on the Schedule C if disclosures in the SEC Form ADV, together
with disclosures in the investment management contract, advised the
plan administrator that the manager is receiving ``soft dollars,'' the
reason the person was receiving the ``soft dollar'' payment, the amount
of ``soft dollars'' or the formula used to determine the amount of
``soft dollars'' that the manager receives in connection with each
securities transaction, and the party or parties from whom the
investment manager is receiving the ``soft dollars.'' The Department
recognizes that it may not be practicable to provide a formula or
estimate to calculate the value of certain types of ``soft dollar''
non-monetary compensation at the plan level, particularly so-called
``proprietary'' soft dollar arrangements, such as access to information
from certain research specialists. In such circumstances, a description
of the eligibility conditions sufficient to allow a plan fiduciary to
evaluate them for reasonableness and potential conflicts of interests
would satisfy the ``amount of compensation'' prong of the disclosure
alternative for Schedule C reporting. When reporting service providers
who received eligible indirect compensation and other compensation, the
service provider would be required to be separately listed on the
Schedule C if the total compensation equaled or exceeded the $5,000
threshold. The plan administrator would check a box to indicate that
some of the compensation was eligible indirect compensation and
complete the other elements of the Schedule C to report information on
the balance of the direct and indirect compensation received by the
service provider. Since the identity of the service provider would be
included on the Schedule C in such cases, separately listing the person
from whom the plan received the required disclosures regarding the
eligible indirect compensation would not be necessary.
The Department has previously expressed its opinion that in hiring
and retaining service providers plan fiduciaries must engage in an
objective process designed to elicit information necessary to assess
the qualifications of the provider, the quality of services offered,
and the reasonableness of the fees charged in light of the services
provided. In addition, the process should be designed to avoid self-
dealing, conflicts of interest, or other improper influence. The
alternative reporting option being adopted as part of the Schedule C
revisions for eligible indirect compensation is intended to emphasize
and reinforce the obligation to review of plan expenses as part of a
plan fiduciary's on-going obligation to monitor service provider
arrangements. It also provides the Department with adequate reporting
to engage in effective oversight activities while addressing concerns
about annual reporting burdens and costs, which are increasingly being
passed on to plan participants and beneficiaries. A party seeking to
avail itself of the alternative reporting option would also bear the
burden of maintaining records sufficient to demonstrate compliance with
the conditions of the alternative reporting option.
Several commenters asked that the Department modify the proposed
Schedule C requirement applicable to plan fiduciaries and certain
enumerated service providers who received, directly or indirectly,
$5,000 or more in total compensation, and also received more than
$1,000 in reportable compensation from a person other than the plan or
plan sponsor. Under the proposal, the Schedule C would have had to
provide
[[Page 64743]]
information identifying the payor of such indirect compensation, the
payor's relationship with the plan or services provided to the plan by
the payor, the amount paid, and the nature of the compensation. The
enumerated service providers were contract administrator, securities
brokerage (stock, bonds, commodities), insurance brokerage or agent,
custodial, consulting, investment advisory (plan or participants),
investment or money management, recordkeeping, trustee, appraisal, or
investment evaluation. The commenters expressed concern that the list
of enumerated service providers was overbroad because it included most
types of plan service providers, including those where compensation
arrangements did not present any real conflict of interest concerns.
The commenters also objected because the reporting requirement
substantially reduced the costs savings and burden reductions of the
aggregate reporting of compensation by affiliates and bundled service
providers. In light of the other revisions being made to the reporting
requirements for bundled service arrangements described above, the
Department is revising the Schedule C instructions to limit the
enumerated service provider list to types of providers where
compensation arrangements presenting conflict of interest concerns are
most likely to exist.
Modifications were also suggested to the aspect of the Schedule C
proposal that required reporting business meals, gifts, promotional
items, and other similar non-monetary forms of compensation. Commenters
complained that the proposal would require costly tracking and
reporting by plan service providers of typical business expenses only
remotely connected to the plans. One commenter cited, as an example,
the need to track and report when an employee of a plan service
provider is treated to a business lunch by another service vendor to
discuss the services the vendor provides to the service provider's plan
clients. The commenter questioned whether the cost of such tracking and
potential reporting, which ultimately could be passed on to the plan or
the plan sponsor, is justified based on value to plan fiduciaries
evaluating the reasonableness of service provider fees. The Department
recognizes that providing meals, entertainment, free travel, or other
gratuities may serve an ordinary business purpose, such as cultivating
goodwill or securing or maintaining a commercial relationship, but
continues to believe that non-monetary compensation should be subject
to Schedule C reporting rules. Access to this information should help
plan fiduciaries gauge whether the service provider's business
decisions with regard to the plan may be influenced by any such
personal benefits. At the same time, excepting from reporting
occasional and insubstantial free meals, gifts, and promotional items
will help to ensure that service providers are not burdened with
reporting routine business gratuities that should be of little interest
to plan fiduciaries.
The Department thus has modified the Schedule C reporting
requirements to exclude ordinary business gifts that are both
occasional and of insubstantial value, for example, widely distributed
items such as pens with a company name permanently imprinted or
ordinary business lunches, where the cost of the gift or meal would be
tax deductible for federal income tax purposes for the person providing
the gift or meal and the gift or meal would not be taxable income to
the recipient. For this exemption to apply, the gift must be valued at
less than $50, and the aggregate value of gifts from one source in a
calendar year must be less than $100, but gifts with a value of less
than $10 do not need to be counted toward the $100 annual limit. If the
$100 aggregate value limit is exceeded, the aggregate value of all the
gifts will be reportable. Gifts from multiple employees of one service
provider should be treated as originating from a single source when
calculating whether the $100 threshold applies. On the other hand, in
applying the threshold to an occasional gift received from one source
by multiple employees of a single service provider, the amount received
by each employee should be separately determined in applying the $50
and $100 thresholds. For example, if six employees of a company
providing administrative services to employee benefit plans attend a
business conference put on by a broker designed to educate and explain
the broker's employee benefit business services, where refreshments
valued at $20 per individual are provided at no cost to the employees,
the gratuities would not be reportable on the Schedule C even though
the total cost of the refreshments would be $120. The Schedule C
instructions have also been revised to emphasize that these thresholds
are for purposes of Schedule C reporting only and to caution filers
that the payment or receipt of gifts and gratuities of any amount by
plan fiduciaries may violate ERISA and give rise to civil liabilities
and criminal penalties.
Commenters also expressed concern that the Schedule C reporting
rule allowing any reasonable method of allocating indirect compensation
among multiple plans as long as the method is disclosed to the plan
administrator would result in confusion for plan officials because
service providers will not necessarily be using consistent methods in
allocating indirect compensation. The diversity in the form and manner
of payment of indirect compensation described in the comments, however,
defied applying a single allocation method for such compensation among
multiple plans. Thus, in circumstances where the amount of indirect
compensation received by a person is attributable to more than one
plan, allowing any reasonable allocation method but also requiring the
method of allocation to be disclosed to the plan administrator provides
the parties with appropriate flexibility in meeting the annual
reporting requirement while ensuring the plan administrator is properly
informed.
Several commenters raised concerns about the proposed indirect
compensation reporting requirements as possibly leading to confusion
among plan officials over ``double reporting'' of service provider
compensation. They cited as an example of such ``double reporting''
situations where an investment advisor is paid an investment management
fee from a mutual fund, and the investment advisor uses some of that
revenue to pay fees to brokers, pension consultants, and others for
marketing and distribution expenses. The commenters were concerned that
if the investment management fee received by the investment manager and
the fee received by a broker, for example, are both required to be
reported as indirect compensation on the Schedule C, plan officials
could incorrectly conclude that the plan paid the broker's fee in
addition to the investment management fee. The Department believes that
the modifications to the form and instructions described above,
including the alternative reporting option for eligible indirect
compensation, should address this concern by giving service providers
flexibility that will allow them to provide plans with disclosures that
can be used to satisfy the Schedule C reporting requirements while also
clearly explaining the indirect compensation in a way that will enable
the service providers to avoid creating confusion about the indirect
fees and compensation they receive.
The Schedule C is also being modified so that service providers
required to be
[[Page 64744]]
listed would separately report direct compensation paid by the plan and
indirect compensation received from sources other than the plan or the
plan sponsor, for example, compensation charged against investment
assets. In addition, in light of the fact that particular service
providers may receive direct and indirect compensation of various types
from various sources, in order to provide more informative disclosures
about the types of fees being paid to or received by plan service
providers, the final forms revisions expand the service codes currently
required on the Schedule C, which identify the types of services
provided, to include fee codes designed to better identify the types of
direct and indirect compensation received. For example, codes were
added for direct payments by the plan out of a plan account, including
charges to plan forfeiture accounts and fee recapture accounts, charges
to a plan's trust account before allocations are made to individual
participant accounts, and direct charges to plan participant individual
accounts (e.g., loan charges, brokerage account service fee,
distribution service charge). Codes for types of indirect compensation
include common investment fees indirectly paid by plans and
participants, such as sales loads (including charges on purchases and
deferred sales charge); redemption fees; purchase fees paid to the fund
(not to a broker); exchange fees charged to an investor when they
exchange (transfer) to another fund within the same fund group; account
maintenance fees; investment management fees paid out of fund assets to
the fund's investment adviser for investment portfolio management;
distribution and service (12b-1) fees; shareholder service fees;
custodial fees; legal expenses; accounting fees; and transfer agent
expenses. The fee codes should provide plan sponsors, participants and
beneficiaries, and the Department with better information on the types
of compensation being paid directly or indirectly by the plan.
The Department believes that this revised framework for the
Schedule C continues to accomplish the objectives of improving Schedule
C reporting of fee and compensation information, while addressing many
of the concerns of the commenters relating to annual reporting burdens,
costs, and potentially duplicative and confusing disclosures to plan
officials. It also provides sufficient flexibility so that plans and
service providers can use other current or future regulatory disclosure
regimes, such as soft dollar disclosure requirements developed by the
SEC, as part of satisfying ERISA's annual reporting requirements.
b. Miscellaneous Schedule C Issues
One commenter asked the Department to confirm that revenue sharing
payments, such as sales loads and 12b-1 fees received from the mutual
funds and other revenue sharing payments from distributors and/or
advisors of the mutual fund for sub-transfer agency services and
shareholder services, are not necessarily ``plan assets'' for purposes
of the fiduciary responsibility provisions of Title I of ERISA solely
by virtue of being required to be listed on the Schedule C. The
commenter pointed out that some revenue sharing payments to plan
service providers are calculated based on the amount of assets a plan
or a group of plans have invested in a particular investment vehicle or
family of vehicles at a given time. Other revenue sharing payments are
not asset-based, but may involve a flat fee. In the Department's view,
the Schedule C reporting requirements are not restricted to plan asset
payments. In general, in evaluating plan investments, identification of
plan assets is governed either by the ``plan asset'' regulation (29 CFR
2510.3-101), or, in situations beyond the regulations, the assets of an
employee benefit plan are identified on the basis of ordinary notions
of property rights. See, e.g., Advisory Opinion 2005-22A. In the
context of a plan's investment in a mutual fund or other investment
vehicle, the plan's beneficial interest generally is its ownership of
shares, units, or an undivided interest in the underlying assets of the
vehicle. The fact that revenue sharing payments charged against the
assets in an investment vehicle are required to be reported on Schedule
C or disclosed under the alternative reporting option would not, by
virtue of the reporting requirement alone, make those revenue sharing
payments plan assets under the plan asset regulation or under ordinary
notions of property rights.
One commenter suggested that revising the instructions to Schedule
C to clarify that health and welfare plans exempt from the financial
reporting and audit requirements by reason of meeting the conditions in
the Department's limited exemption in 29 CFR 2520.104-44, including
plans that rely on the enforcement policy guidance in the Department's
Technical Release 92-01, are not required to file a Schedule C. The
Department has modified the instructions for the Schedule C to make it
clear that, although neither the limited exemption at 2520.104-44 nor
Technical Release 92-01 expressly address Schedule C reporting
requirements, plans that meet the conditions of the exemption or the
enforcement policy guidance are not required to complete and file a
Schedule C to report information on service provider compensation.
Another commenter requested confirmation that where the plan sponsor
pays expenses of the plan, the amounts paid by the plan sponsor, and
not reimbursed by the plan, would not have to be reported on Schedule
C. The Schedule C and its instructions continue to provide that
reporting is only required for amounts directly or indirectly paid by
or received from the plan.
Several commenters expressed concern with the statement in the July
2006 Proposal that if reportable compensation is due to a person's
position with or services rendered to more than one plan, the total
amount of compensation received should be reported on the Schedule C of
each plan if the compensation could not reasonably be allocated among
the various separate plans. The commenters' concern focused on an
example in the preamble to the July 2006 Proposal involving a $1,000
gift from a securities broker to an investment adviser given because of
the investment adviser's relationship with ERISA plans as potential
clients for the securities broker. The preamble assumed the $1,000 gift
could not be reasonably allocated among the ERISA plans and indicated
that in such a case the $1,000 should be reported on the Schedule C of
all plans for which the investment advisor performed services. The
commenters urged clarifying in the instructions that, as long as a
reasonable allocation can be made in such circumstances, the total
value of the gift or other consideration is not required to be reported
on the Schedule C of each plan. The Department agrees that in the case
of gifts or other consideration attributable to multiple plans, only an
allocable share of value of the gift or other consideration needs to be
included on each plan's Schedule C as long as the value of the gift or
other consideration can be reasonably allocated among the multiple
plans.
Commenters also expressed concerns, similar to those submitted by
insurers on the Schedule A described below, regarding the requirement
to identify service providers that fail or refuse to provide the
administrator with the information needed to complete the Schedule C.
The Department continues to believe that identifying service providers
that fail to provide information needed to complete the
[[Page 64745]]
Schedule C is important information that will allow the Department to
better carry out its responsibilities to administer and enforce the
provisions of Title I of ERISA. As noted below in connection with the
similar question being added to the Schedule A, the instructions for
the Schedule C have been changed to remind plan administrators that
they have an obligation to take reasonable and prudent steps to secure
the necessary Schedule C information and that administrators generally
should contact the service providers and make a request for Schedule C
information before identifying a service provider on the Schedule C as
having failed or refused to provide necessary information.
One commenter requested confirmation that the proposed changes
regarding reporting of indirect compensation did not require service
provider compensation reported on a Schedule C filed for a master trust
investment account (MTIA) or 29 CFR 2520.103-12 investment entity (103-
12IE) also to be reported on the participating plans' Schedule Cs. The
indirect compensation reporting requirements were not intended to
change the rule in the current instructions to the Schedule C, which
emphasizes that compensation to a service provider should not be
reported both on the Schedule C for the plan and on the Schedule C for
the MTIA or 103-12IE in which the plan participates. Rather, plan
filers must include the plan's share of compensation paid during the
year to an MTIA trustee or other person providing services to the MTIA
or 103-12IE only if such compensation is not subtracted from the total
income of the MTIA or 103-12IE in determining the net income (loss)
reported on the MTIA or 103-12IE's Schedule H, Line 2k, or is not
reported on the MTIA's or 103-12IE's Schedule C.
Two commenters urged the Department not to eliminate the provision
in the current Schedule C under which only the ``top 40'' highest
compensated service providers are required to be listed on the Schedule
C reporting, as proposed. The commenters suggested that the ``top 40''
limit be retained or replaced with some other limit based on a larger
number of service providers or requiring service providers to be listed
when their compensation exceeded a specified percentage of total plan
expenses. The commenters suggested that, for a very large plan,
requiring all service providers that received $5,000 or more in direct
or indirect compensation could require the plan to list hundreds of
service providers and substantially complicate their Form 5500 Annual
Return/Reports. A review of Form 5500 Annual Return/Report data for
reports filed before the ``top 40'' limit was adopted in the 1999 Form
5500 Annual Return/Report indicates that only a few very large plans
reported 40 or more service providers on the Schedule C. A review of
more recent Schedule C data also reflects that the 40th highest paid
service provider generally was paid as much or nearly as much as the
15th or 20th highest paid service provider even though the Schedule C
requires service providers to be reported in descending order of amount
of compensation. Based on these data, the Department does not believe
continuing the ``top 40'' limit is appropriate.
One commenter suggested that clarifying the reporting year in which
termination of an accountant or an enrolled actuary must be reported on
Schedule C. Although not expressing a preference for either result, the
commenter indicated that it was not clear whether the termination
should be reported on the form filed for the year in which the
accountant was terminated or on the form filed for the year in which a
new accountant performed the plan audit. The instructions have been
revised in response to the comment to state more explicitly the
existing rule that the termination of an accountant or an enrolled
actuary must be reported in the Form 5500 Annual Return/Report for the
plan year in which the accountant or enrolled actuary was terminated.
6. Schedule A (Insurance Information)
The Agencies received a number of comments in response to the
proposed addition of a new section to the Schedule A to identify
insurance providers that fail to give plan administrators the
information necessary to complete the Schedule A. A commenter
representing plan auditors, which supported the change based on the
auditors' experience of having difficulty getting information needed to
complete plan audits, also requested an expansion of the requirement to
cover insurance carriers that did not provide the requisite information
in a timely fashion. In contrast, insurance industry commenters
expressed concern that the reporting requirement may create unnecessary
administrative burdens when plan administrators wrongly identify
insurers as having failed to provide required information. One
insurance industry commenter, describing testimony before the ERISA
Advisory Council on this issue as ``unsubstantiated anecdotal
reports,'' objected to the Department's reliance on a report of the
ERISA Advisory Council (see 71 FR at 41620), as support for adding the
new section. Two insurance industry commenters suggested that, if the
reporting requirement was retained, plan administrators should be
required to advise insurers before identifying the insurer on the
Schedule A as having failed to provide required information.
Section 103(a)(2) of ERISA provides that, if some or all of the
information necessary to enable the administrator to comply with the
requirements of Title I of ERISA is maintained by an insurance carrier
or other organization that provides some or all of the benefits under a
plan or holds assets of the plan in a separate account, such carrier or
other organization is required to transmit and certify the accuracy of
such information to the administrator within 120 days after the end of
the plan year. Given the importance of plan administrators receiving
timely information necessary to complete Schedule A, especially fee and
commission information, the recurring reports of difficulties in this
area, and the recommendation by the ERISA Advisory Council that such a
question be included on the Schedule A to assist plan administrators
and the Department in enforcing the insurance carriers' obligations in
this regard, the Department continues to believe that insurance
providers that fail to provide the necessary information should be
identified on Schedule A.
The Department nonetheless agrees that, in addition to the
insurer's obligation to provide information, plan administrators have
an obligation to take reasonable and prudent steps to secure the
necessary Schedule A information. The Department also accepts that
there may be instances where plan administrators and insurers disagree
over what information is required and other instances where
administrators may identify an insurer on the Schedule A based the
administrator's erroneous conclusion that the insurer failed to provide
required information. The current instructions for the Schedule A that
remind filers of the insurer's obligation to provide information needed
to complete the Schedule A, accordingly, are being expanded to remind
plan administrators that they have an obligation to take reasonable and
prudent steps to secure the necessary Schedule A information and that
they generally should contact the insurer and make a request for any
missing
[[Page 64746]]
information before identifying an insurance provider on the Schedule A.
Another commenter requested confirmation that electronic
transmission of the required Schedule A information would satisfy the
insurer's obligation under ERISA section 103(a)(2). The commenter noted
that some plan administrators may believe that insurers are required
under ERISA to provide plan administrators with a completed copy of the
Schedule A that the administrator could file as part of the plan's
annual report. The commenter noted that some insurers had developed
such a practice as part of the services they provided to policyholders,
but indicated that such practices could be difficult to continue in a
wholly electronic filing environment. In the Department's view, nothing
in ERISA precludes insurers and plan administrators from agreeing to
the insurer's electronic transmission of Schedule A information to the
administrator. The Department also anticipates that some software
providers will have EFAST2 compatible systems that will enable multiple
parties, including insurers, to include information as part of the
development of the plan's annual report. The Department also agrees
that while insurers are required to provide the information necessary
for the plan administrator to complete the Schedule A, insurers are not
required by ERISA to provide the information on a completed Schedule A
itself.
One commenter suggested that the requirement to report fees,
commissions, and other compensation paid to agents, brokers, and other
persons in connection with an insurance contract placed with or
retained by the plan should be reported on Schedule C instead of on
Schedule A. The commenter suggested that such a change would facilitate
a ``level playing field'' in the annual reporting area between insurers
and banks, investment companies, and other investment product
providers. Another commenter suggested that there should be a de
minimis reporting exception on the Schedule A under which persons
receiving monetary or non-monetary commissions and fees totaling less
than $500 would not be required to be listed on the Schedule A. One
insurance company commenter complained that the Schedule A approach to
the reporting of fees and commissions was unduly burdensome on insurers
and service providers and lacked a clearly articulated purpose. The
commenter asked that the Agencies limit or clarify Schedule A reporting
in several ways: Limit Schedule A fee and commission reporting to
``sales-related'' compensation; exempt from Schedule A reporting
payments to a ``general agent or manager'' even if the amounts are paid
in connection with a policy placed with or retained by an employee
benefit plan; address whether compensation can be reported on a
Schedule A for the year in which the compensation was paid rather than
for the year in which the right to the payment accrued; confirm that
payments are not required to be reported if they are made after the
year in which an insurance contract or policy is terminated; and
establish safe harbor methods for allocation of compensation
attributable to multiple policies.
The July 2006 Proposal did not include any proposed changes to the
fee and commission reporting requirements on the Schedule A.\11\ The
Department issued Advisory Opinion 2005-02A in February 2005 to address
a reported pattern and practice among some in the insurance industry of
underreporting commission and fee payments to brokers, agents, and
other persons. This pattern and practice was reported to be based on
incorrect interpretations of the Schedule A, the Schedule A
instructions, and other guidance issued by the Department regarding the
Schedule A reporting requirements. The Advisory Opinion was intended to
explain clearly the Department's views regarding the current Schedule A
reporting requirements. After carefully considering the public comments
on the Schedule A, the Department does not believe that the comments
provide a basis for making major substantive changes to the Schedule A
reporting requirements at this time. The Department, however, agrees
that two changes adopted as part of the final Schedule C reporting
requirements should also be adopted as part of the Schedule A reporting
requirements on insurance fees and commissions.
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\11\ Although the proposal eliminated the Schedule A filing
requirement for plans eligible to file the Short Form 5500, the
Short Form 5500, consistent with the overall objective of improving
fee transparency, the Short Form 5500 adopted from the Schedule A
requirement to report aggregate insurance fees and commissions, in
the form of a compliance question.
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Specifically, the Department previously clarified, as part of an
update of the instructions following the publication of Advisory
Opinion 2005-02A, that compensation paid by the insurer to third
parties for recordkeeping and claims processing services provided to
the insurer as part of the insurer's administration of the insurance
policy is not required to be reported as fees and commissions on Line 2
of the Schedule A.\12\ One commenter complained that the instructions
should have been expanded to include other similar types of
administrative functions. One insurance organization gave as an example
its national accounts programs under which its regional group health
insurance programs are able to offer ERISA plans access to medical
providers in all fifty states pursuant to agreements with its other
regional programs that operate in those states. The Department agrees
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