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Getting Ready for Fee Disclosures,
DOL Audits and Other ERISA Issues
Marcia S. Wagner, Esq.
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Fee Disclosures – NY Ins Reg 194
ERISA Coverage
ERISA 408(b)(2) Disclosures
DOL Audits
Best Practices
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Fee Disclosures – NY Ins Reg 194
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Background on Regulation 194
• 2004 joint investigation by NY AG and Ins Department.
• Ins Department begins outreach and proposing draft
regulation in 2008.
• Regulation 194 issued on Jan 25, 2010.
• Regulation 194 becomes effective on Jan 1, 2011.
• Agency groups (IIABNY and CIBGNY) give up fight to
overturn after loss in NY Appeals Court in 2012.
• Broad implications for other states and agency groups.
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Scope of Regulation 194
• Covers sale of all types of direct insurance.
• Examples include:
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Property/casualty
Life insurance
Accident and health
Surety bonds
Annuities
Individual insurance
Group or blanket insurance
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Role and Compensation Disclosure
• Always required.
• May be provided in writing at or before application for
insurance contract.
• Or may be provided verbally, if written disclosure is
made at or before issuance of insurance contract.
Amount of Compensation Disclosure
• Only required upon request by insured.
• Must be provided at or prior to issuance of insurance.
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Required Content for
Role and Compensation Disclosure
• Producer’s role in transaction.
• Whether producer will receive compensation from
sale.
• Variability of compensation.
• Statement that Amount of Compensation Disclosure
is available upon request.
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Required Content for
Amount of Compensation Disclosure
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Amount of compensation.
Alternative quotes.
Material ownership of insurer.
Material ownership of producer.
Statement about rebates.
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ERISA Coverage
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Core Benefits vs. Voluntary Benefits
• Rising costs created demand for voluntary benefits.
• Attractive “no cost” solution for employers.
Hidden Risk for Voluntary Benefits
• Dispute may arise between employee and insurer.
• If benefits are subject to ERISA, employer and
producer can be pulled into litigation with insurer.
ERISA Coverage
• Core benefits are generally subject to ERISA.
• Voluntary benefits may be subject to ERISA under
certain circumstances.
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ERISA Test for Benefits
• Benefits are “established or maintained” by employer.
• Focus on employer’s involvement in administration.
DOL Safe Harbor for Avoiding ERISA Status
• No employer contributions.
• Voluntary participation only.
• Employer involvement is limited to payroll deductions
and permitting insurer’s promotion of benefits.
• No compensation for employer.
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Blurring of Line Between ERISA vs. Non-ERISA
• Traditionally, only Core Benefits were subject to ERISA.
• But employers have become increasingly involved in
Voluntary Benefits and they may cross the line by:
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Negotiating benefits
Subsidizing cost
Linking coverage to employee status
Using employer’s name in promotional materials
Promoting vol. benefits alongside core benefits
Recommending vol. benefits
Indicating that ERISA applies
Assisting employees with claims and disputes
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ERISA 408(b)(2) Disclosures
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Background for 408(b)(2) Fee Disclosures
• “Hidden” compensation payments from benefit plan’s
investment and insurance products to providers.
– Employers may be unable to evaluate total compensation of
providers.
– Indirect compensation is not prohibited under ERISA.
– But lack of info may lead to plan sponsor’s breach of
fiduciary duties.
• New 408(b)(2) fee disclosures ensure plan sponsors
have sufficient info.
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408(b)(2) Disclosures Are From ERISA’s PT Rules
• PT rules prohibit provider from using plan assets.
• But 408(b)(2) Exemption allows use of plan assets to
pay service provider.
Conditions for 408(b)(2) Exemption
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Contract is reasonable.
Services are “necessary” for benefit plan operation.
Compensation to provider is reasonable.
New requirement for retirement benefits.
– Disclosures must be made before provider is engaged.
• Pending requirement for welfare benefits.
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Fee Disclosures Required for Welfare Benefits
• Current 408(b)(2) fee disclosures do not apply.
• 408(b)(2) Exemption requires general fee disclosures
so employer can confirm compensation is reasonable.
How to Ensure Compensation Is Reasonable
• Employer has duty to request and consider all
compensation (including indirect compensation).
• Providers are subject to liability for participating in
employer’s breach of fiduciary duty.
• Suggested Best Practice for Welfare Benefits
– Providers voluntarily provide 408(b)(2) disclosures.
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Service Providers Covered by 408(b)(2) Rule
• Any person servicing an ERISA retirement plan who
receives $1,000 or more for:
– Investment advisory services
– 401(k) recordkeeping/brokerage services
– Key services provided for indirect compensation
(e.g., insurance, investment consulting).
• Example: Insurance producer who sells life insurance
and annuity products to fund ERISA pension plan.
• Must provide written fee disclosures automatically
(even if not requested by employer).
• Service agreement is not required.
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Required Content for 408(b)(2) Disclosures
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Description of services
Description of compensation
Manner of receipt of compensation
Additional disclosures for indirect compensation
Compensation for provider’s affiliate or third party
subcontractor must be separately disclosed.
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Timing of 408(b)(2) Fee Disclosures
• Disclosure must be made reasonably in advance of
starting or renewing services.
• Changes to info must be made no later than 60 days
after provider becomes aware of change.
• Erroneous info will not result in violation if provider
has acted in good faith and with diligence.
– Errors and omissions must be disclosed within 30 days
after coming to light.
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408(b)(2) Disclosure Failures
• Disclosure failure results in PT.
• Severe penalties for plan sponsor and provider.
• But relief for plan sponsor if corrective action taken.
Required Corrective Action from Plan Sponsor
• Must immediately request corrected disclosure.
• If provider fails to deliver corrected disclosures within
90 days, plan sponsor must notify DOL.
• Plan sponsor may need to terminate provider’s
services in accordance with ERISA duties.
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DOL Audits
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Source of DOL Enforcement Authority
• Civil Enforcement
– ERISA 502(a) empowers DOL to bring civil actions.
– ERISA 502(l) requires 20% civil penalty on all DOL
settlements (subject to limited exceptions).
• Criminal Enforcement
– ERISA 501 imposes criminal sanctions for willful violations
(maximum of $100k/$500k and 10 years).
• Investigative Authority
– ERISA 504 grants DOL broad authority and may subpoena
books/records.
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EBSA’s National Enforcement Projects
• Contributory Plan Criminal Project (CPCP)
– Targets employers and providers who commit fraud and
abuse resulting in unpaid contributions to plans.
• Rapid ERISA Action Team (REACT)
– Focuses on plans of employers filing for bankruptcy.
• Consultant/Advisor Project (CAP)
– Targets providers with undisclosed compensation and
fiduciary self-dealing (variable compensation).
• Health Benefits Security Project (HBSP)
– Focuses on MEWAs and welfare benefits sold to small
businesses by providers engaging in fraud.
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Reasons for Initiating Investigations
• Participant complaints
– Filed with EBSA’s Office of Participant Education
• Referrals from other regulators (e.g., SEC, IRS)
• National Enforcement Projects
• Form 5500 filings
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Procedure for DOL Investigation
• Initial Letter
– Document Request
– Appointment Letter
• Document Production and On-Site Interviews
Closing Letter
• No DOL action to be taken
• “Voluntary” compliance notice
• Litigation letter
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Best Practices
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Before the Audit
1) Maintain stand-alone ERISA policy.
2) Track all client accounts subject to ERISA.
3) Ensure employer has wrap plan for welfare benefits.
– Meets plan document / SPD requirements under ERISA.
– Eliminates multiple 5500 filings.
4) Formalize procedure for fee disclosures and updates.
5) Maintain “model” client documents that reflect
current law.
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Before the Audit (cont’d)
6) Ensure all client service agreements are signed.
7) Develop “model” response for routine 5500 info
requests.
8) Confirm referrals are fully disclosed and do not
violate PT rules.
9) Confirm affiliated and third party subcontractors are
fully disclosed.
10) Provide ongoing education/training.
11) Internal audits.
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During the Audit
1) Choose one point person to serve as liaison.
2) Ask DOL for permission to bring in ERISA counsel.
3) Negotiate scope of document request
(e.g., limit to sampling of client documents).
4) Perform legal review of subpoenaed and any other
requested materials before delivery to DOL.
5) If any discrepancies are uncovered, provide
explanation and/or proposed remedial action.
6) Prepare personnel for on-site interviews.
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Getting Ready for Fee Disclosures,
DOL Audits and Other ERISA Issues
Marcia S. Wagner, Esq.
A0090735
99 Summer Street, 13th Floor
Boston, MA 02110
Tel: (617) 357-5200 Fax: (617) 357-5250
Website: www.wagnerlawgroup.com
marcia@wagnerlawgroup.com
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