Clear comparisons

Last July, the Department of Labor issued the 408(b)(2) interim final regulation on fee disclosure for pension plans. The rule is designed to help plan sponsors and fiduciaries determine whether the fees and compensation they pay the plan's service providers are reasonable.

It requires that certain service providers disclose information to help plan fiduciaries in assessing the reasonableness of contracts or arrangements, including the reasonableness of the service providers' compensation and potential conflicts of interest. Some expect the regulation, effective July 16, 2011, will level the playing field for third-party administrators, many of whom have already been disclosing their fees for years.

"The good news for TPAs is that as a consequence of those regulations, they will no longer be facing competition that says they can give away record keeping or administration for free," says Brian Graff, CEO of the American Society of Pension Professionals and Actuaries. "There have been some companies in the industry that have been marketing themselves as giving away their record keeping services and they will not be able to do that anymore."

The rules will enable plan sponsors to do "more of an apple-to-apple comparison of TPAs," believes Gerald Wernette, principal with Rehmann Financial and director of Rehmann Retirement Builders, an independent TPA.

And now, the DOL is looking at the feasibility of implementing similar fee disclosure rules for health plans. In December, it held a hearing on reasonable contracts or arrangements for welfare benefit plans under section 408(b)(2).

Panel member Phyllis C. Borzi, assistant secretary of labor at the Employee Benefits Security Administration, told those in attendance "the 408(b)(2) regulation, when it was originally proposed in the prior administration, was designed to cover both pension plans and health and welfare plans. Based on the comments that the agency received, we went forward and finalized the 408(b)(2) regulations a few months ago, but focusing only on the pension side, making clear in the preamble to the regulation that we weren't forgetting about the welfare plan side. It's just that we wanted to look at those issues separately, as many of you suggested that we do so."

Borzi went on to say, "I have spent quite a number of years in my career advising plan sponsors about the whole range of employee benefits, and I have to say in my own experience the type of transparency and disclosure that my clients had when they were selecting health plans was far behind the type of disclosure that they had when they were looking at 401(k) plans and other kinds of financial instruments."

Range of testimony

Not surprisingly, the panel heard a range of testimony from a variety of industry stakeholders, including the Society of Professional Benefit Administrators, a national association of independent TPAs, and the National Coordinating Committee for Multiemployer Plans. Both groups argue for more transparency in health plan fee disclosure.

"The whole idea of disclosure for health plans for transparency, we think, is something that's absolutely needed," says Anne Lennan, vice president with SPBA. "Our members, while they administer both self-funded and fully insured plans, lean heavily on the self-funded side. And the challenge they see in the marketplace is that fully insured carriers can offer these huge bonuses and commissions to brokers for bringing them business."

Representatives from NCCMP testified that "under the current ERISA reporting and disclosure requirements, commissions are subject to disclosure through retrospective reporting to plan sponsors. However, the current requirements do not provide the level of transparency needed for plan representatives to make informed decisions in advance of awarding the business."

Allison Klausner, assistant general counsel, benefits, for Honeywell International Inc., testifying on behalf of the American Benefits Council, expressed support for transparency in arrangements for plan services, but suggested the DOL "consider waiting until the dust settles on health care reform before deciding whether to impose new disclosure requirements for health and other welfare benefits service providers.

Health care reform is leading to innovation and new ways of structuring plan services," Klausner said. "Thus, if any new disclosure regulations are to be written, it would be wise to have them designed for the future marketplace, rather than yesterday's marketplace."

Representatives from the insurance industry, meanwhile, maintained that additional regulation isn't warranted, noting that under the laws of most states, brokers and agents are required to disclose in advance the types of compensation they receive.

And while brokers and agents generally are not required to disclose in advance the amount of compensation they expect to receive from placing insurance, the reason for that is "because the actual amount of compensation often cannot be known until after the placement of the insurance," said the Council of Insurance Agents & Brokers in its testimony. "This is the case because commission rates and forms of compensation vary by carrier as well as by program."

In addition, Schedule A of the DOL's Form 5500 requires comprehensive and robust disclosure regarding commissions, fees and noncash incentives earned by insurance agents and brokers.

But Lennan maintains that Schedule A, because it's filed at the end of the plan year, is of little use to plan sponsors when they're making a decision about which service provider to hire. "408(b)(2) is requiring disclosure upfront so the plan sponsor can make a decision about which service provider to go with," she says. "Schedule A does not serve the purposes at all of 408(b)(2)."

CIAB also took issue with the idea that the purchase of insurance products raises the same concerns as those related to 401(k) investment services.

"The two products are completely different, both in character and with regard to the existence of comprehensive state regulation," it stated in its testimony. "They have different purchasers, beneficiary concerns and regulatory schemes. Service providers for defined contribution plans often manage assets for plan beneficiaries, whereas insurance agents and brokers do not. Further, in the 401(k) context, services are performed on a daily basis; in contrast, insurance brokers act only at the plan level by, for example, simply selling products on an annual basis."

America's Health Insurance Plans, a national association representing approximately 1,300 health insurance plans that provide coverage to more than 200 million Americans, along with BlueCross BlueShield Association, maintained in its testimony that there's no need for more disclosure because existing federal and state laws adequately regulate insurance contracts.

"As a general matter, only where employers self-insure benefits should there be a 'services' relationship that would be covered by any new disclosure requirements under section 408(b)(2)," they noted. "Typically only large employers self-insure. These employers are sophisticated purchasers who conduct RFPs and use consultants, lawyers and other specialists to analyze service relationships. There is no evidence that large plan sponsors are not able to obtain fee information and evaluate the comparability of different third-party administrators bidding for business. This approach contrasts with the pension plan arena where even small employers enter into arrangements for services (rather than insurance), and, typically, these small employers do not have access to consultants and other experts."

Lennan says the structure of ERISA has been working for most service providers. "The DOL has already walked down the road of definitely deciding they are going to promulgate some rules on health plan disclosure, and we're delighted about that. We don't think it's going to mean any type of change from what TPAs are already doing."

Spotlight on 403(b) plans further reading

Administration of 403(b) plans could be a major growth area for third-party administrators in the next two to three years, suggest results from a survey conducted by the American Society of Pension Professionals & Actuaries and Brightwork Partners, LLC.

Nearly seven in 10 TPA firms (69%) administer 403(b) plans today, representing only about 2% of these firms' revenue. (401(k) plans, in contrast, represent 68% of revenues).

But nearly three in 10 TPA owners (29%) expect the 403(b) market to be a major growth opportunity in the years ahead, particularly firms that already have sizeable retirement plan assets under administration. The average number of 403(b) plans administered by the surveyed firms jumped by more than half in 2009.

"We've done more design and consulting and are providing more plan administration services to more 403(b) plans than we ever have in the past," says Gerald Wernette, principal with Rehmann Financial and director of Rehmann Retirement Builders, an independent TPA.

One hundred and fifty TPA firms answered numerous questions ranging from key industry trends to best practices to concerns about industry issues.

Business issues dominate TPA owners' concerns; at least one in three are very concerned about achieving their profitability and growth targets, competing with bundled providers or payroll firms and dealing with the cost of regulatory compliance.

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