"Covered Service Provider" Disclosures to Responsible Fiduciaries of Retirement Plans
Your Relationship with Frost Brown Todd
If you have retained Frost Brown Todd LLC ("FBT") to provide legal services related to one or more retirement plans that are subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), you might be wondering if you need certain disclosures from FBT under Department of Labor regulations which are effective for all existing "covered service provider" relationships as of July 1, 2012, and any new arrangements entered into after that date.
New regulations issued by the Department of Labor under Section 408(b)(2) of ERISA (the "408b-2 Rules") require certain retirement plan service providers to give plan sponsors detailed disclosures about the services they provide and the compensation they expect to receive for those services. Failure to obtain these disclosures may mean that you are subject to penalties under ERISA. These disclosures are required to secure an exemption from prohibited transaction rules, which exemption requires you have this information in order to determine that the arrangement is a reasonable one necessary for the retirement plan's administration.
What is a "Covered Service Provider" and Why Does it Matter?
The 408b-2 Rules only apply to certain types of service providers, called "Covered Service Providers." Covered Service Providers include:
- Any registered investment advisor (RIA) providing services to a plan or its participants;
- Any fiduciary to a plan (as defined in ERISA) or to an investment vehicle that ERISA provides is a "look-through" for plan assets purposes (like a common trust);
- Any record keeper or brokerage firm that provides a platform on which investments can be directed by participants in an individual account plan (a "Platform Provider"); or
- Certain other service providers, including attorneys, who reasonably expect to receive "indirect compensation," as defined in the regulations (generally, compensation paid by a party other than the plan sponsor or the plan, such as through revenue sharing, commissions, soft dollars or finder's fees).
In most retirement plan engagements, FBT will not be a Covered Service Provider. FBT is not an RIA or a Platform Provider. FBT could only be considered a Covered Service Provider to the extent it reasonably expects to receive indirect compensation, or serves as a fiduciary to your plan.
FBT Almost Never Receives Indirect Compensation;
FBT is generally retained to provide legal advice to plan sponsors and plan administrators in connection with the design, documentation, implementation, administration and ongoing compliance for their retirement plans, in exchange for a fee that is generally based on the hours worked and the hourly rate of the individual(s) providing the advice. In most cases, FBT's fees are paid by the plan sponsor, but in some cases, the plan sponsor has determined that our fees are a reasonable and necessary plan administrative expense and has directed that the plan assets be debited to pay our fees. In even rarer cases, a plan sponsor has arranged, or asked us to arrange, to have our fees paid by another party who has some connection to the retirement plan (for example, a third party administrator, or by an insurer who allocates a portion of its fees to payment of other plan-related costs).
Except in the rare case where we have been requested to do so by the plan sponsor, and accepted that request in writing, FBT has not made arrangements with other plan service providers for FBT to be paid for plan-related advice or other legal services by another service provider. So, FBT typically would not receive any indirect compensation related to a retirement plan, and, if we do so, it would only be with notice to or advance arrangement by you as the plan sponsor/fiduciary.
If you, as the plan sponsor, direct that some or all of our fees be paid out of some form of "revenue sharing" or if you arrange to have a service provider pay a FBT invoice directly, without our notice and advance agreement, then FBT does not consider itself a Covered Service Provider, as we have made no arrangement for payment by that means.
FBT is Not a Fiduciary and Does Not have Responsibility or Control Over Plan Assets or Administration
FBT's advice on retirement plan matters may relate to functions that are considered settlor functions under ERISA—business decisions about adopting or amending a plan, for example. FBT's advice might also be provided to assist a plan sponsor regarding administrative or fiduciary decisions about a plan. However, FBT generally is not engaged and does not expect to actually exercise enough discretion to have "responsibility or control" over either plan assets or plan administrative matters, and we therefore would not be a fiduciary to any plan.
When we provide advice on matters that are fiduciary in nature—for example, whether a domestic relations order meets the requirements to be qualified and effect an assignment of plan benefits, or whether a claim for benefits should be granted or denied under the terms of a plan—our general understanding is that the plan administrator or another plan fiduciary will consider our advice, but ultimately make the final determination. However, we also recognize that there may be some situations where a plan sponsor/administrator intends to and does act solely on our advice. In that case—and with FBT's agreement—FBT might be considered to be exercising enough discretion to be considered a fiduciary, in that narrow instance.
Do You Really Want the Plan to Pay Legal Fees?
No discussion of legal fees in the context of a retirement plan would be complete without a word of caution about directing your retirement plan to pay FBT fees:
- Attorney-client privilege issues. Please keep in mind that, when FBT provides advice to a plan administrator or other plan fiduciary in that party's capacity as a plan fiduciary, the attorney-client privilege that normally protects communications between a lawyer and the plan sponsor may not apply—many courts have held that, if there is a dispute between a plan sponsor and a participant a "fiduciary exception" to the attorney-client privilege may allow the participant to obtain discovery of communications related to the fiduciary determinations. While FBT will always protect the confidentiality of communications with our clients, it is important for you to recognize that a court could require us to disclose our advice if there is a lawsuit over a fiduciary decision. If you choose to pay (or be reimbursed for) FBT fees out of your plan's assets, you are essentially admitting that you sought our advice in connection with your fiduciary responsibilities, making it more difficult to resist a demand for disclosure of our advice if there is later litigation regarding your plan.
- Only some legal fees are appropriate plan expenses. If you choose to pay (or be reimbursed for) FBT fees out of your plan's assets, keep in mind that you, as the plan sponsor/administrator, need to first reach the conclusion that the portion so paid is reasonably necessary for the plan's administration, and not more in nature of a benefit to the plan sponsor. The Department of Labor has issued numerous items of guidance on specific facts as to what can, and what should not, be paid from a plan's assets. For example, fees for our work advising you about things you have discretion to amend in your plan if you desired, is generally not a legitimate plan expense, but advice about legally-required amendments, hardships, service agreements, or participant communications, generally would be something you could elect to have the plan pay.
- Fees paid by the Plan must be disclosed to participants, if the plan allows participant direction of investment. Beginning August 30, 2012, if your plan allows participants to direct investments, all costs and expenses charged to the Plan must be disclosed to participants (first, by describing what might be charged in a "General Plan-Related Information" notice, and then in specific amounts as the charges are accessed, in quarterly benefit statements). We expect many plan sponsors will cease charging any legal, audit and other charges that do not related to a plan's investment options or administrative platform to the plan, since doing so now requires additional disclosures and explanations, and because the burden to carefully consider what the plan can pay is high.
408b-2 Disclosures (just in case, and because we want you to know)
If and to the extent that (1) FBT is aware that you have arranged for payment of any part of our fees using indirect compensation (from some source of funds other than the plan sponsor's general assets or the plan's assets), or (2) we could be considered to act as a plan fiduciary in a narrow circumstance like the examples above, then, and only then, is FBT a Covered Service Provider with respect to your plan. Whether or not we are a Covered Service Provider, we thought it couldn't hurt to share with you the same information that any Covered Service Provider would share. Below is the list of things a Covered Service Provider must disclose to you as a plan fiduciary under the 408b-2 Rules.
Description of Services
FBT generally will provide legal advice with respect to the design, documentation, implementation, administration and ongoing compliance for all types of tax-qualified and ERISA-covered retirement plans. Our specific services may include drafting plan documents, amendments, summary plan descriptions and summaries of material modifications, administrative forms and other participant communication materials or reviewing such documents prepared by you or other service providers; preparing or reviewing filings with the Department of Labor, Internal Revenue Service, Pension Benefit Guaranty Corporation or other government agencies; reviewing and negotiating service provider agreements, disclosures and other materials; responding to questions about interpretation of plan documents or applicable laws, regulations and other guidance; and related inquiries. From time to time, we will raise issues for you as laws change or plan amendments are needed, but most or our work is performed as and when requested by you.
Statement of Fiduciary/RIA Status
FBT is not a registered investment advisor under the Investment Advisors Act of 1940 or any state law. FBT does not intend to act as a fiduciary as defined in Section 3(21) of ERISA. If you believe FBT is acting in a fiduciary capacity with respect to your plan, please inform us in writing immediately.
Description of Direct Compensation
FBT's fees are based primarily on the time expended by our attorneys and paralegals on providing the services described above, including attorney and paralegal travel time, which is billed at the normal hourly rate. If you have arranged a different billing arrangement, that should be confirmed in writing to you. If you are not sure on what basis we are charging for our service now, just ask.
Hourly rates for attorneys and paralegals for retirement plan-related services now range from $200 to $515 per hour, based on the expertise and experience level of the professional involved. The rates are reviewed periodically and may increase from year to year. FBT also charges clients for direct expenses that we incur in performing the services described above. Expenses may include such items as charges for computerized research services and hard copy document reproductions, long distance telephone calls, travel expenses, messenger service expenses, overnight mail or delivery charges, extraordinary administrative support, filing fees, court costs, fees of court reporters and charges for depositions, and fees for expert witnesses, plus other expenses we incur on your behalf.
FBT expects that in most cases our fees and expenses will be paid from the plan sponsor's general assets and therefore will not be considered direct compensation under the 408b-2 rules. However, we understand that some clients choose to pay some of our fees and expenses directly out of plan assets or cause the plan to reimburse the plan sponsor for some fees and expenses paid by the plan sponsor initially (to the extent permitted by ERISA). In that case, whatever part of our fees and expenses you choose to pay out of plan assets, if any, would be direct compensation.
Description of Indirect Compensation
Compensation for FBT's services includes our fees and expenses, as described above under Direct Compensation. We will not be paid any indirect compensation unless you separately and specifically arrange for and agree to that payment.
Description of Compensation Paid Among Related Parties
FBT does not receive any compensation from any affiliates with respect to services we provide to or about a retirement plan. We will, occasionally, with disclosure to you and after you have agreed to the terms of their services, hire other service providers such as valuation firms, accountants or third party administrators, as subcontractors in connection with services that relate to a retirement plans.
Description of Compensation Paid on Termination of the Engagement
You can terminate our representation at any time by written notice to FBT. Any fees and expenses incurred for services performed before the relationship terminates and reasonable charges for winding up any outstanding items and returning files to you or transferring files to new counsel will be due under the normal terms of our engagement.
Compensation for Recordkeeping Services
FBT does not provide recordkeeping services.
Investment Disclosures for Investment Fiduciaries or Platform Providers
FBT does not serve as a fiduciary to any investments deemed to hold plan assets or as a Platform Provider.
Manner of Receipt of Compensation
FBT generally sends monthly statements for our fees and expenses, unless you have asked for and we have agreed to a different billing period. You, the client, determine the extent to which the amounts billed on our statements will be paid directly by the plan sponsor, from plan assets or from some other source.