Highlights of the 2009 Form 5500 Schedule C

dol_logo1Many people have asked about the new 2009 Schedule C requirements, so I felt it was time to do a quick overview.

Major Changes:

  1. Direct vs. Indirect Fees:  Fees are separated into those paid directly by the plan and those received indirectly from another service provider.

New Language: “You must complete this Part, in accordance with the instructions, to report the information required for each person who received, directly or indirectly, $5,000 or more in total compensation (i.e., money or anything else of monetary value) in connection with services rendered to the plan or the person’s position with the plan during the plan year.  If a person received only eligible indirect compensation for which the plan received the required disclosures, you are required to answer line 1 but are not required to include that person when completing the remainder of this Part.”

BrightScope Commentary:  This is the fundamental change in the new Schedule C and if filled out correctly should give the DOL and participants a better view into who is receiving revenue sharing dollars.  I am interested to see how effectively these forms are filled out.

2. Investment Expense Ratio Breakdown:  The DOL has issued guidance on what types of indirect compensation must be disclosed.  I find it interesting where the line of distinction is drawn between what must be disclosed on the Schedule C and what is considered an “operating expense of the investment fund” and thus not reported.

New Language: “In the case of charges against an investment fund, reportable “indirect compensation” includes, for example, the fund’s investment adviser asset-based investment management fee from the fund, fees related to purchases and sales of interests in the fund (including 12b-1 fees), brokerage commissions and fees charged in connection with purchases and sales of interests in the fund, fees for providing services to plan investors or plan participants such as communication and other shareholder services, and fees relating to the administration of the employee benefit plan such as recordkeeping services, Form 5500 filing and other compliance services. Amounts charged against the fund for other ordinary operating expenses, such as attorneys’ fees, accountants’ fees, printers’ fees, are not reportable indirect compensation for Schedule C purposes. Also, brokerage costs associated with a broker-dealer effecting securities transactions within the portfolio of a mutual fund or for the portfolio of an investment fund that holds “plan assets” for ERISA purposes, should be treated for Schedule C purposes as an operating expense of the investment fund not reportable indirect compensation paid to a plan service provider or in connection with a transaction with the plan.”

BrightScope Commentary:  This is exactly the kind of analysis that BrightScope is currently doing.  BrightScope feels that it is critical to separate out all the components of the expense ratio into the appropriate categories: management fee, 12b-1,sub-TA, shareholder servicing etc.  The new Schedule C validates our current approach and is an important first step towards bringing clarity to 401k fees.

3. Disclosure of Non-Cooperation:  The list of providers who fail to disclose indirect compensation to the plan administrators.

BrightScope Commentary:  This is the list that no one wants to be on.  In a fine example of encouraging self-policing the new Schedule C encourages the plan sponsor to list plan service providers who failed or refused to provide the information necessary to complete the new Schedule C.  As a service provider you certainly don’t want to show up on Schedule C Part II too many times:

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All interested parties should read the DOL’s FAQ about the new Schedule C.

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