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New DOL Proposed Rules on Disclosing TPA Compensation

Key Points

>> Brokers Placing Fully-Insured Business are subject to this disclosure rule.  Clarifications on this point would be helpful in the final rule; SPBA will request clarifications.      

>> Broker fees must be disclosed separately from TPA fees upfront.

>> Float income must be disclosed separately.

>>  Written comments on the proposed regulation should be received on or before February 11, 2008.     

As announced in the December 18, 2007 SPBA Email Alert, the Department of Labor (DOL), Employee Benefits Security Administration recently released a proposed rule (§2550.408b-2) that requires plan service providers (such as TPAs) to disclose the compensation they will receive, directly or indirectly, and any conflicts of interest that may arise in connection with their services to an employee benefit plan.  The new rule sets forth the items that must be in writing and disclosed to the plan fiduciary (i.e., plan sponsor) before the contract or arrangement begins. Some TPAs already disclose the details of compensation arrangements in their administrative contracts and may not need to make major changes to their contracts (however, some changes will be needed).  Other TPAs may not be as explicit in their disclosure as will now be required under this proposed rule.  Any contracts that are based solely on a handshake or meeting of the minds will no longer be allowed.

SPBA has received numerous TPA responses to the SPBA Email Alert that will help us prepare comments to DOL on the proposed rule (comments are due by February 11, 2008).  TPAs want explicit clarification on whether these proposed disclosure rules also apply to brokers providing fully insured health policies to group health plans.  SPBA spoke to one of the writers of the regulation, Kristen Zarenko, concerning this issue and she noted that a broker placing fully insured business with an insurer would be subject to the new disclosure rules provided that the broker is serving in an advisory/consulting capacity to the plan.  In SPBA's comments to DOL we will explain how the plan sponsor relies on the broker to survey the available options and make a recommendation to the plan sponsor.  The surveying and recommending process is an advisory/consulting function and clearly subject to the disclosure rules, in our view.     

TPAs also want clarification on how the proposed rule applies to bonuses awarded to brokers.  Please carefully read this article, which will give you many more details than the SPBA Email Alert, and let us know your comments (email Anne, or Fred,  You may also want to submit your own comments directly to DOL.  There are a number of ways to submit comments, online or by mail.  See the actual proposed regulation, posted on the SPBA member-only website, for details on how to submit comments (under the new section, look for "DOL Proposed Rule on TPA Fee Disclosure").    

Keep This In Mind - The proposed rule is not written specifically for health plans, but rather applies to many different types of employee benefit plans (e.g., pension, disability, etc.) receiving a host of different services (investment advisory, insurance, banking, auditing, recordkeeping, administration, consulting, legal, etc.).  The Department of Labor needs our assistance in understanding the unique arrangements that exist in the health plan arena in order to craft a final rule that addresses the concerns of TPAs for a level playing field with respect to the disclosure of fully-insured commissions.

DOL is expecting a heavy volume of responses to this proposal, especially concerning the disclosure required when service providers extend meals, gifts, or outings to the plan sponsor.  According to Kristen, DOL seeks feedback on how to establish a threshold disclosure requirement for these types of expenditures.    

Motivation for the Proposal – DOL recognizes that the increasing complexity in the way service providers are compensated makes it challenging for plan sponsors to understand what the plan actually pays for specific services and whether compensation arrangements pose any potential conflicts of interest.  The goal of the proposal is to provide comprehensive and useful information to plan sponsors when entering service contracts to enable them to assess the reasonableness of the fees paid for services and the potential for conflicts of interest that may affect a service provider's performance.  This is not a new concept or change of policy.  This was the intent of ERISA from the start. 

Effective Date – While this rule is proposed, the rule is clarifying an already existing regulation and consequently courts may apply this proposed rule to existing contracts. DOL proposes that this new rule take effect 90 days after publication of the final regulation in the Federal Register.    


When selecting or monitoring service providers, ERISA section 404(a)(1) requires plan fiduciaries to act prudently and solely in the interest of the plan's participants and beneficiaries, and for the exclusive purpose of providing benefits and defraying reasonable expenses of administering the plan.  The fiduciary needs to have sufficient information to enable the fiduciary to make informed decisions about the services, the costs, and the service providers.

A service relationship between a plan and a service provider (such as a TPA) is generally a prohibited transaction because a service provider is a "party in interest" to the plan.  However, ERISA exempts certain arrangements under section 408(b)(2) between plans and service providers that otherwise would be prohibited transactions if the contract or arrangement is reasonable, the services are necessary for the establishment or operation of the plan, and no more than reasonable compensation is paid for the services.

The purpose of the proposed rule is to amend the current regulations under ERISA section 408(b)(2) to clarify the meaning of a "reasonable" contract or arrangement.  Currently, the regulation states only that a contract or arrangement is not reasonable unless it permits the plan to terminate without penalty on reasonably short notice.

Proposed Disclosure Requirements      

The proposed regulation provides that a "reasonable" contract or arrangement between an employee benefit plan and certain service providers must require the service provider to disclose the compensation it will receive, directly or indirectly, and any conflicts of interest that may arise in connection with its services to the plan. 

Which Service Providers are Subject to Disclosure? The proposed regulation applies to the following service providers. 1) Fiduciaries under ERISA or under the Investment Advisers Act of 1940. 2) Service providers who perform banking, consulting, custodial, insurance, investment advisory (plan or participants), investment management, recordkeeping, securities or other investment brokerage, or third party administration services.  3) Service providers who receive indirect compensation in connection with accounting, actuarial, appraisal, auditing, legal, or valuation services.  Note:  TPAs are considered service providers.       

The proposed disclosure requirements, generally, do not apply to medical provider networks.  The proposal applies to contracts or arrangements for services to employee benefit plans, and not to arrangements with entities that provide plan benefits to participants, rather than providing services to the plan itself.  According to the preamble, if a plan fiduciary contracts on behalf of a welfare plan with a medical provider network, a doctor that is a part of the network and has no separate agreement with the plan would not be a service provider to the plan.  On the other hand, a pharmacy benefit manager that contracts with an employee benefit plan to manage the plan's prescription drug program would be covered as a service provider.  Aggregate reporting of fees is permitted when the TPA arranges the PBM deal on behalf of the plan (meaning that the PBM fees would NOT need to be broken out separately from the TPA fees).  See "Bundle of Services" section below for information on aggregate reporting.

A "reasonable" contract or arrangement to provide services to an employee benefit plan must satisfy the following conditions.

>> The terms of the contract or arrangement shall be in writing.

>> The terms of the contract or arrangement (including any extension or renewal of such contract or arrangement) shall require the service provider to disclose in writing all services to be provided to the plan under the contract, the compensation or fees to be received by the service provider and the manner in which the compensation or fees are to be received.  (See "Information Required to be Disclosed" below for details).

The terms of the contract must specifically require the service provider to disclose in writing, to the best of its knowledge, the required information.  The DOL believes it is important for the "responsible plan fiduciary" (the entity having the authority to enter into contracts on the plan's behalf), to obtain assurance from the service provider that it has disclosed complete and accurate information.  The contract, therefore, must include a statement by the service provider that, before the contract was entered into, all required information was provided to the "responsible plan fiduciary."

The proposal does not prescribe the manner in which such disclosures should be presented to the plan fiduciary, other than requiring a statement by the service provider that the disclosures have been made.  All of the required disclosures need not be contained in the same document, as long as all of the required information is presented to the "responsible plan fiduciary" in writing before such fiduciary enters into the contract or arrangement.  Written disclosures may be provided in separate documents from separate sources and may be provided in electronic format, as long as these documents, collectively, contain all of the disclosure elements required.    

>>  The terms of the contract or arrangement shall require that the service provider disclose to the plan fiduciary any material change to the terms no later than 30 days from the date on which the service provider acquires knowledge of the change.

>> The terms of the contract or arrangement shall require the service provider to disclose all information requested by the "responsible plan fiduciary" in order to comply with the ERISA reporting and disclosure requirements (such as the 5500 Form). 

>>  The service provider must comply with the disclosure obligations under the contract or arrangement. (Note:  In a related regulatory action, DOL proposed a class exemption that would give relief to a "responsible plan fiduciary" that entered into a contract that is not "reasonable" due to a failure of the service provider to comply with its disclosure obligations.)

>>  The contract or arrangement must permit termination by the plan without penalty to the plan on reasonably short notice.      

Information Required to be Disclosed

1.  The terms of a "reasonable" contract or arrangement shall require the service provider to disclose in writing all services to be given to the plan, and with respect to each such service, the compensation or fees to be received by the service provider, and the manner in which the compensation is to be received. 

How is compensation defined? - Compensation or fees include money or any other thing of monetary value (for example, float income, gifts, awards, and trips) received, or to be received, directly from the plan or plan sponsors or indirectly (i.e., from any source other than the plan, the plan sponsor) by the service provider or its affiliate in connection with the services to be provided.  An affiliate of a service provider is any person directly or indirectly controlling, controlled by, or under common control with the service provider, or any officer, director, agent, or employee of, or partner with, the service partner.  

Compensation or fees may be expressed as a monetary amount, formula, percentage of the plan's assets, or per capita charge for each participant or beneficiary of the plan.  The key is that the manner in which the compensation or fees are expressed must enable the plan fiduciary to evaluate the reasonableness of the compensation or fees.

Bundle of Services – "If a service provider offers a bundle of services to the plan that is priced as a package, rather than on a service-by-service basis, then only the service provider offering the bundle of services must provide the disclosures required."  "The service provider must disclose all services and the aggregate compensation or fees to be received, directly or indirectly, by the service provider, any affiliate or subcontractor of such service provider, or any other party in connection with the bundle of services."  "The service provider shall not be required to disclose the allocation of such compensation or fees among its affiliates, subcontractors, or other parties,...."   

For TPAs that offer clients numerous services priced as a package, such as disease management, PBM, and utilization review, the proposed rule requires only the TPA offering the bundle of services to provide the disclosure.  The TPA functioning as the bundled service provider and acting as the intermediary for the other service providers must disclose all services and the aggregate compensation or fees to be received, directly or indirectly, by the TPA and other service providers. The TPA is not required to break down this aggregate compensation among the individual services comprising the bundle.  However, there is an exception to the aggregate disclosure rule for broker fees (see "Separate Reporting of Broker Fees" below) and float revenue.

For TPAs that offer clients numerous services priced on a service-by-service basis, the proposed rule implies that each service provider who is subject to the rule is required to provide separate disclosure. Note:  According to the preamble, PPOs are not considered service providers.

The DOL does not intend this rule to result in any "double counting" of compensation.  For example, an employee's salary or a bonus that is paid to an employee from the general assets of his employer (i.e., the service provider) would not need to be separately disclosed, even if the employee is paid in connection with services to an employee benefit plan. 

Separate Reporting of Broker Fees – While a TPA is not required to disclose the allocation of the aggregate fees among the various service providers (UR, PBM, etc.) when the services are priced as a package, the proposed rule includes an exception for fees that are "set on a transaction basis, such as finder's fees, brokerage commissions, and soft dollars." 

TPAs who attended the SPBA 2007 Spring Meeting and conveyed their concerns about hidden broker fees in the TPA's compensation to DOL officials will be gratified with this provision that requires broker commissions to be disclosed separately from TPA fees.  DOL listened, heard and addressed your request in the proposed rule.  When brokers request your TPA to include their fee in your fee and not list their portion independently, you may now say that DOL regulations require the broker commission to be disclosed as a unique item.  This provision, as you can see from this article, is a part of a much broader rule on plan service provider fee disclosure to plan sponsors and was not designed to specifically target brokers of TPAs.  So, brokers should not feel singled out.  The broker issue is buried in an exception to reporting aggregate plan service provider fees. The exception can be found at §2550.408b-2(c)(1)(iii)(A)(3).

2.  Whether the service provider (or an affiliate) will provide any services to the plan as a fiduciary.

3.  Whether the service provider (or an affiliate) expects to participate in, or otherwise acquire financial or other interest in, any transaction to be entered into by the plan in connection with the contract or arrangement and, if so, a description of the transaction and the service provider's participation or interest therein.

4.  Whether the service provider (or an affiliate) has any material financial, referral, or other relationship or arrangement with a money manager, broker, other client of the service provider, other service provider to the plan, or any other entity that creates or may create conflict of interest for the service provider in performing services according to the contract or arrangement and, if so, a description of such relationship or arrangement.

5.  Whether the service provider (or an affiliate) will be able to affect is own compensation or fees, from whatever source, without the prior approval of an independent plan fiduciary, in connection with the provision of services (for example, as a result of float income, incentives, performance-based, or other contingent compensation).

If the amount a TPA receives in float compensation will not be approved by a plan sponsor, then the TPA must state that it will receive float compensation and explain the nature of the compensation.  Note:  The preamble references DOL Field Assistance Bulletin 2002-3 for additional information on the disclosure of float compensation. 

6.  Whether the service provider (or an affiliate) has any policies or procedures that address actual or potential conflicts of interest, and, if so, an explanation of these policies or procedures and how they address such conflicts of interest.        

When Must the Terms be Disclosed? 

The terms of the contract or arrangement must be disclosed before the contract or arrangement was entered into (or extended or renewed). §2550.408(b)(2)(c)(1)(iii).  The proposal does not designate any specific time period prior to entering into the contract or arrangement for receipt of the required disclosures.  Under general ERISA fiduciary obligations, the fiduciary must ensure that it has information early enough to prudently consider the information before agreeing to an arrangement with a service provider.

Consequences for Failing to Comply

If the contract or arrangement fails to comply with the disclosure requirements, both the service provider and the plan fiduciary (i.e., plan sponsor) would be subject to excise taxes that could reach as high as 100% of the amount involved if the violation is not corrected within 90 days.  Relief, in the form of a proposed class exemption, may be afforded plan fiduciaries when they believe their service providers have disclosed complete information and it turns out that they have not (see next paragraph).        

Proposed Class Exemption for Plan Fiduciaries when Plan Service Arrangements Fail to Comply with ERISA section 408(b)(2)

In a related regulatory action, the Department issued a proposed class exemption to provide relief to plan fiduciaries who entered into deficient contracts with service providers that failed to comply with their disclosure obligations. 

Under the proposed class exemption, plan fiduciaries must take the following steps to avail themselves of the exemption.

>> The plan fiduciary must have entered into the contract or arrangement with a reasonable belief that the contract or arrangement complied with ERISA section 408(b)(2). 

>>  Once the plan fiduciary discovers the failure, the plan fiduciary must request in writing that the service provider furnish the appropriate information.

>> If the information is not furnished within 90 days from the date of the request, the plan fiduciary must notify the Department. 

>>  The plan fiduciary should use judgment to determine if the service provider relationship should be terminated.   

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