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ERISA Section 408(b)(2) for Plan Service Providers: Could This Be a Glass Half Full Kind of Thing?

Tuesday, June 5, 2012

By Ilene H. Ferenczy and James C. Paul, Ferenczy + Paul LLP

If you are in the benefits industry (and perhaps even if you are not) and have not been living in a cave for the past several years, you know that the deadline for a service provider to disclose his or her compensation from working with a retirement plan is July 1 of this year. This has been something of a combination of Chicken Little (“The sky is falling!”), the Emperor's New Clothes (“There's nothing there! My broker is stripped naked!”) and business optimism (“Let's make lemonade out of lemons, shall we?”). Nonetheless, as we come to the waning months of the “catch-up” part of this project, if we remove the hyperbole, we may just find that this is a better way for us all to do business.

The Checkered Past of the Regulations

The road to where we are has been fraught with twists and turns. The Department of Labor (DOL) under the Bush Administration issued proposed regulations in 2007 that were the real starting point for this disclosure project.1 These regulations were the first attempt by DOL—whose jurisdiction generally extends only to employers and plan fiduciaries—to creatively use the prohibited transaction exemption that permits service providers to work for plans and get paid as the means to force service providers to bow to its will. These regulations were withdrawn early in the Obama Administration in 2009, so that it could put its imprimatur on the rules, and then reissued with the oxymoronic title of “interim final” regulations in July 2010, to be effective in July 2011.2 These interim final regulations left several issues open to be outlined in final regulations. Service providers sat in some state of limbo between July 2010 and early 2011, expecting the final regulations. As the deadline neared, DOL extended it to April 2012.3 The DOL finally issued the final regulations in early February 2012 and further extended the initial compliance date to July 1, 2012.4

What Do the Regulations Do?

ERISA Section 406(a)(1)(C) prohibits the furnishing of goods or services to a plan by a party in interest. A party in interest includes any person providing services to a plan.5 So, in the absence of an exemption, providing new or continued services to a plan will be a prohibited transaction. However, ERISA Section 408(b)(2) provides it is not a prohibited transaction for a service provider to enter into an arrangement with a plan to provide services for the plan, so long as the arrangement is reasonable, the services are necessary for the establishment or operation of the plan, and the compensation paid is reasonable. Historically, DOL regulations have interpreted the “reasonable arrangement” requirement to ensure that the contract is not of undue length, and that there are not unreasonable termination charges.6 In other words, DOL sought to protect a plan from entering into a stupid contract that it could not easily get out of.

The new regulations extend the requirements for having a “reasonable contract” to force the provider, within a reasonable time before the plan signs on, to disclose how much it will get paid to do the work. Note that the issue is not really how much is charged— which would seem to cover only that which is billed directly to the plan—but how much the service provider receives, which includes payments from others, particularly financial institutions.

If service providers just billed for their work and got paid by the plan, this regulation would be unnecessary. But, that is not the case over the past 20+ years, as financial institutions and tax code Section 401(k) plans have come to dominate the retirement plan landscape and many different provider compensation arrangements have developed. Now, money changes hands all the time, through revenue sharing payments made by financial institutions to other service providers. These payments are not made from the plan assets directly, but are taken from the investments' expense charges.

How is this possible? Mutual funds, which are the vehicles primarily used by retirement plans for participant direction of investments, charge the investor a fee. This fee, in its purest form, pays for the cost of designing and maintaining the mutual fund (including such items as the compensation of the manager of the mutual fund, as well as sales commissions to those who market the fund). This fee is generally a percentage of plan assets, and is called the “expense ratio.”

Mutual funds commonly provide a part of this expense ratio to the service providers for assisting in the plan or investment administration. The expense ratio is reflected on the plan prospectus, but the prospectus does not necessarily reveal who receives a share of that ratio. As a result, payments made to service providers in this fashion come indirectly from plan assets—the plan pays the expense ratio out of its investment in the mutual fund, and the mutual fund provider pays other service providers a share of that ratio.

Therefore, these payments are out of the view of the plan sponsors and administrators, and in absence of the disclosure required by the new regulations, these responsible parties have absolutely no idea how much money people are making off their plans.

Because it would be a fiduciary breach for a plan administrator to permit the plan to enter into a contract that is unreasonable, the changes to the regulations under Section 408(b)(2) are not required to force the administrator to evaluate the costs of a contract. However, because so much of the compensation paid to the service provider is outside the plan administrator's view, something needed to be done—at least in the eyes of DOL, but also in the opinion of many others in the industry—to make the providers show their cards to the fiduciaries who decide which service providers to hire.

A Side Note About Revenue Sharing

The various types of revenue sharing paid from the expense ratio, such as 12b-1 fees and sub-transfer agency fees, compensate a service provider or sales person for various activities in which it engages on behalf of the fund or the shareholder-plan. For example, sub-transfer agency fees are provided to a recordkeeper in exchange for the recordkeeper accounting for the various plans and participant accounts, and providing only “omnibus” trading instructions in relation to the fund.

The idea is generally as follows: suppose a recordkeeper has five clients, all of whom are making buy or sell orders in relation to one mutual fund. Rather than placing five individual buy and sell orders, the recordkeeper aggregates the orders, engages in one net transaction, and then makes the proper allocations of the fund and the sales proceeds among its clients. The recordkeeper is paid a sub-transfer agency fee because it has consolidated the trades and kept track of who gets what funds and money from the consolidated transaction.

According to at least one commentator, most of these distinctions are more meaningful for securities regulators than for plan fiduciaries.7 The bottom line for plans and their administrators is that service providers are given these payments and the plan fiduciary must evaluate what the providers do in relation to both this indirect revenue sharing compensation and that which is paid directly by the employer or the plan.

Some mutual funds offer different classes of the fund to buyers, and the different classes have different expense ratios and different expense charging methods. Some classes may be front-loaded with charges (i.e., you pay when you buy); others back-loaded (you pay when you sell); some are available only to certain classes of investors, such as institutional funds that are very large or retirement funds. Generally, funds that are marketed to large institutions have lower expense ratios and lower revenue sharing.

At least in theory, a service provider is going to charge what he thinks his services are worth. If he is not paid through revenue sharing, he will charge a direct fee to the plan. However, revenue sharing has historically obfuscated provider compensation in two ways.

First, many plan administrators had misconceptions about what the service provider was paid because they knew nothing about the indirect compensation. As a result, they may have authorized a level of direct compensation that, when added to the indirect compensation, was in excess of what the administrator may have believed the services to be worth.

Second, some plan sponsors or administrators knowingly selected funds with more revenue sharing, so that the costs of the plan would not be readily visible to (and cause concern among) the participants, who were paying the charges through the investment vehicles. The fee disclosures sought by DOL are intended to ameliorate both of these obfuscations by showing the players all the cards.

Okay, Let's Have It. How Does This Stuff Work?

There have been myriad articles that provide a primer on what is required under the Section 408(b)(2) regulations. This article is a shorter version. In addition, providers can use this checklist as a guide for ERISA Section 408(b)(2) compliance.8

Who Has to Comply?

You are subject to these rules if you are a covered service provider or CSP and you reasonably expect to receive direct or indirect compensation of $1,000 or more.9 There are three types of CSPs:

Category 1: This category includes fiduciaries who provide services directly to plans or to an investment contract, product, or entity that holds plan assets, and registered investment advisors (RIAs) who provide services directly to plans.10 If you do this kind of work, you're covered under the regulations, do not pass Go, do not collect $200 (at least, not without disclosing it first).

Category 2: This category of service providers relates only to defined contribution plans that permit participants to self-direct their investments.11 The service providers included in this category are those that the industry deems to be “platform providers”—that is, the service provider that offers recordkeeping or brokerage services in connection with the provision of the designated investment alternative. A designated investment alternative (or “DIA”) is an investment option made available by the plan to the participants and in which the participants may invest their accounts. If the only investment options are self-directed brokerage accounts (i.e., each participant is given full access to pretty much the entire stock exchange), there are no DIAs, so there are no service providers in this category.

There was some concern when the regulations were first issued that this category would include any recordkeeper that worked in conjunction with the platform, regardless of whether they had helped choose the investments or even had anything to do with the investments other than to reflect them in participants' accounts. Although even the final regulations do not clarify this question, it has become known throughout the industry via DOL representatives speaking at various conferences that DOL intends to include here only those people or entities who actually make that platform available. So, if the third party administrator (TPA) has a “daily valuation” operation in-house, the TPA is likely the platform provider. If the client uses a financial institution or insurer, such as Transamerica, Hartford, ING, or John Hancock (to name a few) for those services, the TPA is not the platform provider.

Category 3: This is the catch-all category, including anyone who provides services in the following areas: accounting, auditing, actuarial, appraisal, banking, consulting, custodial, insurance, investment advisory, legal, recordkeeping, securities, or other investment brokerage, third party administration, or valuation services.12 However, those who provide these services are not CSPs unless they, a related company, or a subcontractor receives indirect compensation. If all money goes directly from the plan or the plan sponsor to the service provider, the service provider is not a CSP.

Differentiating Between Direct and Indirect Compensation

Direct compensation is that which is paid by the plan directly to the service provider, an affiliate, or a subcontractor.13 Generally, affiliates are companies that control or are controlled by the contracting service provider.14 Subcontractors are those who do not contract in their own right with the plan, but whose services are included in what the CSP offers.15 For example, if a TPA offers actuarial services, and then “back shops” them to an outside actuary, the actuary is a subcontractor.

Indirect compensation is that which is paid by someone else to the service provider.16 Usually, the payor of indirect compensation is a financial institution that pays securities-related compensation such as commissions, 12b-1 fees, and sub-transfer agency fees (commonly referred to as “revenue sharing” payments). Indirect compensation could also include such things as finders or referral fees or the like. For example, if the service provider lets a participant know that the financial institution offers IRAs for rollover accounts and the financial institution pays the service provider $25 for the referral, that payment is also indirect compensation.

There are some variations on these definitions that are used for purposes of completing Form 5500, Schedule C. The definition for fee disclosure purposes under the 408(b)(2) regulations is not necessarily the same. (Why make it easy?)

Note that payments by the plan sponsor are not categorized above. That is because payment by the plan sponsor rather than the plan or another service provider does not give rise to any issues under Section 408(b)(2). Again, if there's no transaction with the plan, there's no need to comply with Section 408(b)(2).

Covered Plans

Only ERISA-covered plans must meet these rules.17 Plans that are not covered by ERISA, such as government plans and nonqualified plans, are not subject to the fee disclosure rules. In addition, IRA-based plans (including SEPs and SIMPLE-IRAs) are specifically excluded from coverage in the final regulations. Finally, the final regulations confirmed that so-called “one participant plans” are not subject to Section 408(b)(2). The latter group of plans is not really made up only of plans that cover only one participant. This has become a phrase commonly used to describe plans that cover only the business owner(s) and his, her, or their spouse(s).

The current regulations also exclude from coverage plans that are not retirement plans, i.e., health and welfare plans. These plans will ultimately be subject to fee disclosure obligations, but DOL is taking one bite at a time—regulations for welfare plans will be issued in the future.

Last but not least, the final regulations issued in February 2012 clarified one other excluded category—oldie, moldy Section 403(b) programs. This category includes 403(b) annuity contracts or annuity accounts that meet the following requirements:•  They were issued to a current or former employee before Jan. 1, 2009;

•  The employer ceased to have any contribution obligations to the contract or account, and in fact made no further contributions to the contract or account in relation to plan years, after Dec. 31, 2008;

•  All of the rights and benefits in the contract or account are legally enforceable by the employee-participant against the insurer or custodian without employer involvement; and

•  The employee-participant is fully vested.18

These kinds of accounts and contracts have been a headache in relation to all of the IRS and DOL 403(b)-related initiatives in the past few years, as they are treated as belonging to the individual participants and not to a cohesive plan sponsored by the employer.

What Has to Be Disclosed

In simple terms, the service provider must disclose three things:•  What services it provides;

•  Whether it is a fiduciary or RIA; and

•  How much money it gets for doing the listed services, whether from direct compensation or indirect compensation.19

There are variations on what actually must be included in the disclosure, depending on the category of service provider and the type of compensation being received, but that is the essence of the rules.

One of the more interesting disclosure requirements relates to those entities that provide complete services on a “bundled” basis. One of the complaints of their competitors, predominantly TPA firms, is that these entities don't break out the various costs to enable a potential client to compare them with a mix of companies that together will provide the same services. The final regulations require that a bundled provider separate out the recordkeeping services, and provide a “cost” for those services, either based on what they would charge someone who hired them for an unbundled arrangement (if such a thing exists), or on some reasonable estimated basis.20 This ostensibly will enable the unbundled providers to compete on an even playing field.

The final regulations added another disclosure requirement. Under another fee disclosure initiative from DOL, the plan administrator must provide certain information to participants about the fees and expenses tied into the DIAs if the plan is participant-directed (such as expense ratios, historic performance, comparisons to a benchmark, the website for the investment, and the like).21 This obligation belongs, as noted, to the plan administrator. However, the plan administrator is in no real position to have that information. Therefore, the final regulations use the same method to help the plan administrator to meet this obligation as they do to help the plan administrator judge whether a contract is reasonable. Under the final regulations, the service provider who is in a position to provide the required information on the investments must give such information to the plan administrator so that the information can then be released to the participants.22 A CSP is in the position to provide the information if the information is within the control of, or reasonably available to, the CSP.

It is possible that the issuer of the investment(s) (i.e., a registered investment company, an insurance company qualified to do business in any state, an issuer of a publicly traded security, or a financial institution supervised by a state or the federal government) will be in the best position to provide the information, but the TPA or other CSP has a closer contact with the plan administrator. In that circumstance, the TPA or CSP may pass on what it gets from the issuer(s) to the plan administrator. If (a) the TPA or CSP is not an affiliate of the issuer; (b) the TPA or CSP acts in good faith and does not know that the materials are incomplete or inaccurate; and (c) the TPA or CSP provides the plan fiduciary with a statement that it is making no representations as to the completeness or accuracy of such materials, a “pass-through safe harbor” exists.23 The safe harbor protects the person doing the pass-through from being considered to be responsible for the data provided.

When Must the Disclosure Happen?

Although we are in a catch-up period during which it appears to the naked eye that the 408(b)(2) disclosures are after-the-fact in nature, that could not be further from the truth. The purpose of these rules is to make this information available before the plan administrator initially hires the service provider or renews or extends the arrangement. That's the time when the plan administrator is deciding which provider to hire, and knowing what the plan will be charged is an integral part of that process.

The 408(b)(2) regulations, therefore, require disclosure reasonably in advance of the time the contract is entered into, extended, or renewed.24 What is “reasonably in advance”? No one knows. We refer to this as the “no kissing on the first date” rule, as it prevents the plan administrator from hiring people on the spot with no time for reflection on the information that is provided. The plan administrator must have time for this reasoned reflection and decision-making and, presumably, cost-comparison with other service provider candidates.

Changes in the disclosed information must generally be given to the plan administrator within 60 days of the service provider knowing about them.25 However, investment-related disclosures can be updated annually for changes.26

Sometimes when the service provider is first hired, information about the various investment products is not available. Decisions are made later. If that is the case, the compensation information must be provided to the plan administrator within 30 days from the date on which the investment product holds plan assets.27

Is there any requirement to reconcile the predictive information provided in the 408(b)(2) disclosures with what actually happens? Schedule C to the Form 5500 will recap actual plan expenses each year. However, Schedule C is not required for “small plans,” generally those with fewer than 100 participants, so those plans will not receive this after-the-fact kind of data.

For service provider agreements existing on July 1, 2012, a “catch-up” disclosure must be provided on or before that date.28 This disclosure should still be forward-looking, although it may be difficult not to take into account the service provider's compensation history when this disclosure is put together.

Errors, Omissions, And Just Plain Noncooperation

The final regulations acknowledge the duties of all parties in this contract-making exercise. Of course, the emphasis is on the duty of the service provider to give the disclosure. However, the regulations also discuss the duty of the responsible plan fiduciary (RPF) (who is generally the plan administrator) to obtain the information before someone is hired or retained.

If the service provider does not give the disclosure to the RPF, the contract becomes unreasonable and the provision of services is a prohibited transaction. The penalty for engaging in such a transaction, enforced by IRS rather than DOL, is a nondeductible excise tax equal to 15 percent of the “amount involved.”29 There is some controversy as to what constitutes the “amount involved” for this purpose. DOL has been clear that it will not opine on this issue, which is delegated to IRS under the division of responsibilities between the two agencies. Section 4975(f) of the Code states that the amount involved is the amount that exceeds reasonable compensation.30 However, some IRS representatives have opined at conferences that, if the disclosure obligations have not been made, the entire contract is deemed to be “unreasonable,” and the amount involved is equal to all fees charged under the contract. Hopefully, future guidance will clarify this issue.

But that's not all. If one engaged in a prohibited transaction, he/she must correct the transaction. The general way for the transaction to be corrected is to disgorge any amount that the offending party received in connection with the transaction.31 If this is enforced by IRS, a service provider may be required to return all fees earned in the unreasonable contract to the plan. Perhaps the correction will be simply providing the disclosure? Maybe. Don't count on it.

If the RPF does not receive the required disclosure and does nothing, the RPF may also be responsible for the prohibited transaction. Further, if the contract is later found not to be reasonable, engaging in the contract can be considered a breach of the RPF's fiduciary duties of loyalty and prudence to the plan, making the RPF personally liable for any losses suffered by the plan.

The regulations give the RPF a chance to redeem itself. If the disclosures are not received, the RPF must send the CSP a written request for the information.32 Upon the earlier of (a) the CSP's refusal to provide the information; or (b) the expiration of 90 days without the CSP's provision of the disclosure, the RPF must take two steps:33

•  Within 30 days, send a notice to DOL, reporting the CSP's failure (the regulations outline the information required to be in the notice);34 and

•  If the CSP is to provide further services under the agreement, the RPF must fire the CSP.35

If the CSP provided the information, but it was inaccurate (either through error or omission), there will be no prohibited transaction if the CSP acted in good faith and with reasonable diligence and it corrects the information to the RPF within 30 days from the date that it becomes aware of the mistake.

What's Still Undecided?

Probably the Number One undecided item has to do with model portfolios. These investment options, which may be known by different names such as asset strategies, have two common incarnations:

1. An investment manager takes the DIAs that have been chosen for a plan, and constructs one or more portfolios from those investments, to meet the needs of the participants. The various portfolios may differ from one another in virtually the same way that any fund-of-fund differs from another, but the differences are usually tied to either time (i.e., some portfolios are for young participants, others for older individuals) or to risk tolerance (i.e., conservative, moderate, aggressive), or both.

2. An investment manager takes the DIAs and some other investments not otherwise available to plan participants, and constructs the portfolios.

In most circumstances, these model portfolios are not subject to SEC regulations. In fact, most commonly, the individual participants do not own shares in the portfolio, but simply the proper mix of the investment alternatives. The investment manager ensures that the participants' investments are rebalanced regularly, or moved from one selection of investments to another as the market changes. But, what is shown on the participants' statements is usually the individual account ownership of the various DIAs or other funds.

There are some plans that offer only these model portfolios as their designated investment options, and individual mutual fund choices are unavailable to the participants.

The undecided issue is: are these model portfolios DIAs? If they are, then the investment manager of the portfolio or another responsible service provider must give the participants the chart of information for these investments mentioned earlier, showing the expense ratio, the historic performance, benchmarks, websites, etc. However, these model portfolios commonly have no such information available.

Investment managers of model portfolios, as well as some benefits organizations, such as the American Society of Pension Professionals and Actuaries, have suggested that providing the data for the individual funds that make up the portfolio should be sufficient—after all, that is what the participant would see if he or she made up the portfolio alone. This is a tougher nut to crack when the individual funds are not limited to the DIAs, as a participant selecting the portfolio would not know any information about the possible universe of investment options. It is harder to make the argument that the model portfolios are not DIAs if they are the only options that a participant may select in a given plan.

As mentioned above, the definition of “platform provider” is still a matter of supposition. It's probably a correct supposition, but clarification from DOL would be helpful nonetheless.

It is increasingly common, particularly in relation to fee disclosure initiatives, for some or all of the indirect compensation paid from a plan to be placed in an “ERISA account.” CSPs are then compensated in whole or in part from the ERISA account. Again, this structure may be known by alternate titles. There are two flavors of ERISA accounts:

1. The ERISA account is part of the plan assets and shown on the Form 5500 as such. If the ERISA account is not zeroed out by the payment of compensation to service providers at year end, the plan should allocate any remaining amount to participants as additional earnings.

2. The ERISA account is part of the financial institution's assets, and does not really belong to the plan. The plan may direct the financial institution to use the assets of the ERISA account in many ways (generally outlined in a contract), but these accounts are commonly forfeited by the plan if the plan ceases to use the institution for services.

ERISA accounts are unaddressed in the 408(b)(2) regulations. It would make sense that, if a service provider is paid from the first type of ERISA account, it is being paid from plan assets and this represents direct compensation. On the other hand, if the second variety of ERISA account is present, those payments come from the assets of the financial institution, and are indirect payments.

In either of these circumstances, it is possible that the CSP will not know at any time before receiving the check how it is to be paid. In that situation, how can the CSP know at the initiation of its relationship with the plan whether its compensation is subject to 408(b)(2) reporting or not? The likely answer is: it's better to be safe than sorry, so better to disclose than not. However, that's not very satisfying.

A similar circumstance arises when there is reimbursement for fees. For example, suppose that the service provider invoices the plan sponsor, who pays the service provider directly, but then obtains reimbursement of this plan-related expense from the plan or an ERISA account. Direct compensation? Indirect compensation? Irrelevant compensation?

Okay, I've Got a Headache. When Do We Get To the Half-Full Part?

Can service providers consider the 408(b)(2) rules to be to their advantage? Absolutely.

Great Opportunity to Firm Up Service Contracts

Plan service providers, particularly TPAs, commonly have weak (if any) service contracts with their clients, leaving themselves open to significant liability. If a TPA has no written contract, then it has no way of knowing the terms by which it works, and can find itself sued for not performing a service that it had no intention of performing in the first place.

This is a great time to tone up that service contract. Think about adding the following types of provisions:•  A contract term. Saying when your services begin and when they end is important. Because the 408(b)(2) disclosures are due anytime the contract renews, having an “evergreen” provision, under which the contract remains in force until it is affirmatively terminated under a specific section of the document protects you from having to provide annual disclosures. Furthermore, limiting your responsibility for times before you were hired can prevent you from taking the fall for errors made by your predecessor.

•  Who's the contract between and who's paying for it? Having both the plan sponsor and the plan administrator sign the contract ensures that both are on the hook for your fees.

•  What state law controls the contract? While ERISA and federal law control employee benefit plans, most courts have found that service provider contracts are governed by state law. If you service clients outside your county or state, you may want to specify that the contract will be interpreted according to the laws of your state, and that litigation must take place in your county.

•  Damage limitations. You can have provisions in your contract that limit the types of damages and the amount of damages for which you are responsible. If you make a reasonable mistake that other service providers like you would make, is it a breach of contract under your document? Are you liable for punitive damages if you are sued for malpractice? If a client is audited and the plan is disqualified, are you responsible for everything?

•  Arbitration clause. Many people have varied views of arbitration to resolve disputes under a contract. On the one hand, it's cheaper than litigation. On the other hand, there are those that claim that arbitrators like compromise, so you are less likely to be found completely innocent of fault. Talk to your business lawyer. Be sure to carve out small claims court amounts, so that you can go that cheap route when you can.

•  Who can you talk to? You're working with confidential information. Can you talk to your client's employees? The client's accountant and attorney are likely to charge the client for time they spend talking to you. Are you authorized to call them?

•  Who you are? Can the client rely upon you for legal advice? Tax advice? Do you provide investment advice to the participants? Are you a fiduciary to the plan?

This list can go on and on. The point is, the 408(b)(2) disclosures can be a perfect forum for formalizing your relationships with your clients and protecting yourself when things go wrong.

Everyone's Got to Do It

Because this is a legal requirement, you are not the only one telling your client about what you charge. Anyone else with whom he or she consults has to do the same thing. Many postulate that clients will respond favorably to those who are open and forthcoming with this information, and negatively to those who continue to obfuscate what they are paid.

But, at any rate, gone are the days when anyone can say, “We don't charge for that” when, in fact, they are getting paid through indirect compensation that the client doesn't see.

It's Time to Hold Our Heads Up

Many in this industry, particularly TPAs, have a long and proud history of acting like they are not worth their salt. This may stem from the 1970s, when ERISA was young, and many of the service providers to plans were insurance people. Commonly, TPA services were performed by the salesperson's “girl in the office,” and the value of those services was understated.

It's now a new century and the complexities of plan administration are overwhelming. A TPA provides an important service that may only be fully understood when the plan is audited by IRS or DOL and is given a clean bill of health. To the extent that anyone doing this work is still shy about standing up and being counted, this process should cure you of that behavior. It is an important time for us all to declare proudly our worth to plans, and to charge for it appropriately.

With whom do you work that does not have clear-cut billing and collection policies? If you think about it, most businesses are very firm about what they do and what they charge. From your cleaning woman to your gasoline station to your mechanic to your lawyer, they know what they do is valuable and they know how to charge you for it. Why are you putting yourself at an artificial disadvantage by not working under the same open basis?

It Will Help You Charge for What You Do

Formalizing your fee agreements and schedules will free you to charge for what you do, and to know that the client is on notice. The ability of clients to claim that they “didn't know you charge for that” will evaporate. You can stand firm.

Clarity About What You Charge Makes Collections Easier

It is common that an ability to collect fees is tied directly to client uncertainty or false impressions about what you are going to charge. It's not the amount that the client objects to; it's the fact that they pictured something different in their own minds when they thought about it. Clarity about what you do and what you charge should make it easier for you to collect fees that are now relatively predictable.

It may also be easier for you to know what to charge. If you put something on a formal fee schedule, you should have no uncertainty about whether it is appropriate to charge for the service.

The Easier You Make It, the Easier It Is

If you work to come up with a disclosure system that you find understandable and workable, it will be much easier to go through this process after the initial catch-up work is done. The more complex you make it, the harder it will be to do the initial disclosures and those that have to be done for future clients.

This is a time for you to come to terms with your relationships with your clients, and to come up with a workable and understandable way for you to perform your services and charge for what you do.

Secrecy Begets Questionable Integrity

We are not meaning to imply that those who have not fully disclosed fees in the past have no integrity. What we are saying, however, is that people who keep secrets from their clients about compensation appear to those clients to have questionable integrity when those secrets come to light. Having one's fees on the table looks and feels more honest to both you and your clients.

Ilene H. Ferenczy ( is managing partner in the Atlanta office of the employee benefits law firm Ferenczy + Paul LLP. James C. Paul ( is a partner in the Gold River, Calif., office of the same law firm.


This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.

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