Tips for Preparing for 408(b)(2)

Fred Reish, ESQ, partner and chair of the Financial Services ERISA Team at Drinker Biddle & Reath, LLP, explained that with the final regulations, the DoL included a sample guide with details on how to comply with the regulation.

Larry H. Goldbrum, general counsel, The Spark Institute, added there is a significant concern with details provided in the sample document by the DoL. He says some service providers think the document does not easily clarify the details of the regulation. Some service providers are therefore creating their own high-level summaries of the regulation

404a-5 Disclosures  

Reish explained that the requirement for the 404a-5 disclosure of fees from plan fiduciaries to plan participants will shift the burden onto the service provider to make sure that the plan sponsor has all the information needed to deliver the participant disclosures. He said this was not required before. 

According to the DoL documents, this includes, “information or data about the designated investment alternative that is within the control of, or reasonably available to the covered service provider and that is required for the covered plan administrator to comply with the disclosure obligations described in 29 CFR 2550.404a-5(d)(1).”  The document adds that 404a-5 information “must be disclosed as soon as practicable, but not later than the date the investment alternative is designed by the covered plan.”

Goldbrum said these regulations are going to cause difficulty for recordkeepers. “I think in those situations, recordkeepers are going to have to think about their protocols and their practices,” he said. 

Brokerage Accounts 

Reish said that according to the 408(b)(2) service provider fee disclosure regulation, providers do not have to disclose the expenses of each brokerage account. “The covered service provider must disclose all applicable information concerning the brokerage window that is required by the other provisions of the final rule.”

Reish added that the provided description must contain information that is sufficient to permit a responsible plan fiduciary to evaluate the reasonableness of such compensation in advance of the service arrangement. The description has to be detailed so a fiduciary can evaluate it.

The DoL adds that if the information, such as the identity of the payer and specific descriptions of indirect compensation, are unknown at the time of the disclosures, then the description does not need to identify the specific payer prior to the service arrangement. Instead, the description can provide information that would allow the responsible plan fiduciary to compare the expected compensation with compensation that would be received by competing broker/dealers for similar investment services.

Reish stated that the industry needs to request guidance on when a person picks a specific investment for which the information is no longer general, whether the broker has the right to give specific information. 

He added that most broker/dealers provide brochures with information on their compensation already, including commission structure, forms of compensation, revenue sharing, etc.

Goldbrum added, “Our main focus has been dealing with the indirect compensation. This unknown distinction creates a problem. You are trying to provide the plan fiduciary with enough information. There should be a way to provide enough information to evaluable the arrangement with disclosure of the worst-case scenario.”

Part of the concern of making a specific disclosure is that many brokerage firms consider that information proprietary. The revenue sharing or the indirect compensation arrangement is not unique to the retirement plan. That might be information that is tied to the entire firm's fund. They consider that very proprietary. With fee disclosure, this information is going to become regularly accessible to their competitors, which is a concern.

Plan Sponsor Responsibilities 

After the disclosures are made, Reish said plan sponsors will need to “determine if all of the covered service providers have made all of the required disclosures. That is a tough burden. "If they do not get everything from everyone, they need to request the disclosures in writing,” said Reish.

If the information is not provided within 90 days, the plan sponsor will need to terminate the covered service provider. “They can do it in an orderly fashion, but they will still have to [terminate]. They will also need to report the covered service provider to the DoL,” said Reish.

He added that plan sponsors also need to evaluate the disclosure information provided to them from the covered service providers.