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ERISA vista | PLANADVISER July/August 2014

The DOL’s Proposed 408(b)(2) Guide

Questions advisers are asking

By Fred Reish and Joan Neri editors@assetinternational.com | July/August 2014
Art by June Kim

ADVISER QUESTION: We heard that the Department of Labor (DOL) issued a proposal that requires advisers, as covered service providers, to give a “guide” to their 408(b)(2) disclosures. Is that right?

ANSWER: As with any good legal question, the answer is … it depends.

First, let’s cover a little background. As the question suggests, the 408(b)(2) disclosure requirement applies to plan advisers. By plan advisers, we mean financial advisers with broker/dealers (B/Ds), investment advisers with registered investment adviser (RIA) firms, and insurance brokers and agents. The DOL’s proposal, if and when it is finalized, will require a guide to the 408(b)(2) disclosures—but only for some advisers. Also, it is only a proposal and could take a year or more to become final. In the meantime, the DOL is soliciting comments about the proposal from the private sector.

The rationale behind the proposal is that a guide will help plan sponsors find the disclosures concerning an adviser’s services, compensation and fiduciary status. To do that, the guide would include specific cross-references—for example, to a page in a specified document. The DOL also suggests that other “locators” may be permissible, such as section numbers within files. The key to compliance will be determining what qualifies as a permitted locator. That is where the battle will be fought in the comments about the proposal. The DOL will need to draw a fine line between cross-references that are adequate for unsophisticated plan sponsors and those that are overly burdensome and costly for advisers.

With that, let’s examine when the guide would apply.

The DOL proposes that the guide requirement would apply when an adviser uses multiple or lengthy documents to make its 408(b)(2) disclosures. The term “multiple”—meaning more than one document—is easy to understand. The DOL has not defined “lengthy” and is asking for comments about this. For the purposes of our answer, let’s assume it means 15 pages.

So, if advisers use several documents or documents of 15 pages or more to make their disclosures, the proposal would require a guide. How will this affect advisers?

First, RIA firms: It has been our experience that most investment advisers make their 408(b)(2) disclosures in a single document through an advisory agreement. Assuming that the advisory agreement is less than 15 pages, a guide would not be required. On this basis, most RIA firms would not need a guide.

However, some RIA firms may use multiple documents, such as an advisory agreement and its Form ADV, to make 408(b)(2) disclosures. In that case, the RIA firm would have to decide whether to provide a guide or consolidate its disclosures into a single document.

Now, let’s look at broker/dealers and their financial advisers. In our experience, many B/Ds use multiple documents to make their 408(b)(2) disclosures. For example, a B/D may provide a description of its services in an account-opening form. Then, it may provide its compensation disclosure in other records, such as an insurance company application or mutual fund prospectus, as well as on its website. In that case, the B/D would be required to provide a guide with specific locator references to compensation, services and fiduciary status, providing the specific document and page number or section references.

Development of the guide for these B/Ds will be a difficult task. As far as we know, there is no established, computerized method for examining multiple documents to create a guide that is specific enough to satisfy the proposed regulation. That said, it is likely that B/Ds, particularly non-wirehouse B/Ds, will contract with outside providers to develop a single, relatively short 408(b)(2) disclosure document.

The impact this proposal will have on advisers depends upon the form in which 408(b)(2) disclosures are made. Broker/dealers that also have to comply with securities law disclosures will face the most challenges. Still, the multiple document disclosures currently used by some B/Ds are difficult for plan sponsors to review and understand—particularly small, unsophisticated plan sponsors.

It is important that the B/D community use the comment period to educate the DOL about the challenges they face in managing this issue of disclosures in an appropriate and cost-effective manner. That is needed in order to end up with a balanced regulation that provides plan sponsors with easy and time-efficient access to the required information.


Fred Reish is chair of the Financial Services ERISA practice at the law firm Drinker, Biddle & Reath. A nationally recognized expert in employee benefits law, Fred has written four books and many articles on the Employee Retirement Income Security Act (ERISA), Internal Revenue Service (IRS) and Department of Labor (DOL) audits, as well as pension plan disputes. Joan Neri, who has been associated with the firm since 1988, is counsel on the Employee Benefits and Executive Compensation Practice Group. Her practice focuses on all aspects of employee benefits counseling.