Re-Examining Insurance Companies Annual Disclosure Obligations to - PDF document

Re-Examining Insurance Companies’ Annual Disclosure Obligations to Employee Benefit Plans Mark B. Koogler* Shawn G. Lisle** An Overview Through recent initiatives, the insurance industry and regulators are demanding that insurers and brokers provide greater disclosure of commissions and similar fees. Changes in the securities industry and retirement plan marketplace, designed to assure greater transparency in the fees borne by participants in employee benefit plans subject to the Employee Retirement Income Security Act of 1974 as amended (ERISA), may also impact these disclosure obligations. Recently, the Department of Labor (DOL) provided new guidance about an insurer’s obligations to report commissions and fees paid to persons in connection with ERISA plans. Accordingly, now is the time for all insurers issuing products and services to ERISA plans to review their disclosure obligations to plan administrators and, if necessary, modify disclosure practices to comply with applicable law. Plan administrators should likewise pay careful attention to the growing trends of transparency and the recent DOL guidance. They should make certain they are receiving accurate and timely information from insurers in order to prepare the Annual Return/Report of Employee Benefit Plan (Form 5500 series) and in fulfilling their fiduciary duties to ensure that the fees being charged are reasonable in light of the services provided. Insurers and similar organizations are generally required by ERISA and DOL regulations to provide plan administrators with the information necessary to complete annual Form 5500 filings, including insurance information required to be reported on Schedule A thereto. Such information must be provided by an insurer within 120 days after the end of the plan year. As part of the information required to be reported on Schedule A, plan administrators must identify all persons who received commissions or fees from an insurer in connection with services rendered to the plan or its participants, the amount of such compensation, and the purpose of such fees. The DOL construes the meanings of commissions and fees broadly, as is evidenced in Advisory Opinion 2005-02A, which was issued on February 24, 2005. The recent Advisory Opinion reiterates prior DOL guidance that all commissions and fees, directly or indirectly attributable to a contract or policy between a plan and an insurance company or similar organization must be reported on Schedule A. The new guidance makes it clear that the instructions for Schedule A should not be interpreted as limiting an insurer’s reporting of commissions and fees to only sales commissions paid on contracts or policies issued to ERISA plans. Instead, the Advisory Opinion unequivocally explains that commissions and fees paid to brokers or agents, must be reported if they are in any way based on the value of a contract or policy issued to an ERISA plan. Accordingly, persistency and profitability bonuses must be reported. Likewise, finder’s fees and * Mark B. Koogler is a partner with Porter Wright Morris & Arthur LLP. He is head of the firm’s Insurance and Financial Services Practice. His legal practice focuses on insurance transactional and regulatory matters, financial services organizations, and mergers and acquisitions. ** Shawn G. Lisle is an associate with Porter Wright Morris & Arthur LLP. He focuses his practice on employee benefits and ERISA matters.

similar payments made by third parties to brokers, agents, and others must be disclosed if the insurer reimburses the third party separately or as a part of the overall fees paid to the third party. Fees and commissions classified as “profit-sharing” payments, delayed compensation, or reimbursements for various marketing and other expenses must also be disclosed. The DOL guidance provides that the disclosure obligations apply even if payments are made from a separate bonus fund and not the insurance company’s general assets. Nonmonetary compensation, such as prizes, trips, gifts, awards, memberships, vehicle leases, stock awards, and other benefits, must also be disclosed if any part of it is based on a policy or contract placed with ERISA plans. Advisory Opinion 2005-02A also describes how insurers should allocate fees and commissions among ERISA and non-ERISA plans. Based on the new DOL guidance, we believe that bonuses in the nature of commissions paid to brokers, agents, third-party administrators (TPAs), and registered investment advisors (RIAs) generally will have to be disclosed by insurers and reported by plan administrators on Schedule A. Similar disclosure and reporting obligations also seem applicable to commissions and administrative expenses paid out of asset fees charged under an insurance product, as well as to payments made by insurers to TPAs as reimbursements for plan administration and similar services. As previously noted, insurers should be providing such disclosures to plan administrators within 120 days after the end of the plan year. However, we believe it would be prudent for plan administrators, in connection with fulfilling their ERISA fiduciary duties and annual reporting obligations, to request commission and fee information from the insurers that provide products and services to their ERISA plans. In this regard, plan administrators should ask appropriate questions, as necessary, to ensure that they have complete and accurate information about fees and commissions paid by insurers during the plan year. If an insurer refuses to provide the information requested, plan administrators are instructed by DOL to note the refusal directly on Schedule A. Revenue sharing arrangements have been a customary and long-standing practice in the insurance and securities worlds, particularly among annuity providers and mutual funds. However, such arrangements are often not disclosed to plan sponsors. Given the current regulatory and legal climate of moving towards greater transparency in insurance product pricing, insurers may want to consider the benefits of voluntarily disclosing to plan administrators the sources and amounts of payments received pursuant to revenue sharing arrangements with mutual funds offered under variable annuity contracts sold to ERISA plans. Several insurance industry leaders have reportedly already begun to fully disclose revenue sharing arrangements to their clients. Insurers should also monitor judicial and regulatory interpretations of state unfair trade practice statutes to assure that their current disclosure practices concerning compensation arrangements under their insurance products comply with applicable state law. 2