Correction Program Sought for 408(b)(2) Errors

Defined contribution (DC) plan advisers and recordkeepers could very well make unintended mistakes when trying to provide sponsors with all of the detailed information required by Rule 408(b)(2), Frederick Reish told PLANADVISER. Reish is a partner in Drinker Biddle & Reath’s Employee Benefits & Compensation Practice Group, based in Los Angeles.

This is why Drinker Biddle sent a letter to Phyllis Borzi, assistant secretary of labor at DOL’s Employee Benefits Security Administration (EBSA), laying out the foundation for a voluntary correction program for 408(b)(2) failures. “We recognize that the regulation contains a remedial provision for certain disclosure errors,” Drinker Biddle said in the letter. But a “significant number” of advisers and service providers are bound to make innocent, seemingly innocuous errors that will result in “the serious consequences of engaging in a prohibited transaction,” Reish and his colleagues told Borzi.

Asked by PLANADVISER what kinds of mistakes advisers and service providers might make, Reish said a simple computer coding error could omit disclosures from all of their Employee Retirement Income Security Act (ERISA) plan clients. In addition, there may be advisers who only serve one or two DC plans, insurance brokers and small broker/dealers who might be unaware of the rules in the first place.

An EBSA spokesperson confirmed that the agency has received Drinker Biddle’s request for a 408(b)(2) voluntary correction program, and would only say that “the agency welcomes suggestions on ways to improve its programs.”

Reish said his firm made the request because advisers and service providers are worried. “Clients have talked to us about correcting their mistakes” and are concerned about repercussions from failing to fully comply with the rule, Reish said. “While the regulation does have a 30-day correction period for good faith errors or omissions,” he said, “the provision was drafted very narrowly and would not apply to most of the circumstances raised by our clients.” Reish also noted that EBSA and the Internal Revenue Service offer remedial programs for other regulations.

Drinker Biddle said a correction program would “promote compliance by providing an incentive for service providers to correct their errors with reduced penalties, while simultaneously allowing the regulatory agencies to leverage their resources to pursue intentional violations, increasing overall compliance and enforcement results.” The end result, the law firm told EBSA, would be better protection for plan participants.

Here is how it would work. After a covered service provider (CSP) discovered an error in its fee disclosure report to a plan sponsor—and had corrected the error—it would be allowed to anonymously submit an application developed by EBSA, along with documentation of the correction, to overwrite the error. If EBSA approved the steps the CSP had taken to fix its mistake, it would issue the CSP a no-action letter telling it that no further investigation would be necessary and that it would be given relief from penalties.

Asked why he thinks it is important for the program to be conducted anonymously, Reish said: “Until the DOL indicates the amount of the filing fee and the methodology for correction, [which could engender] a more punitive approach, it could discourage service providers from using the program, and it will be difficult for service providers to voluntarily disclose themselves.”

The no-action application would also require a fee, yet to be determined, Reish said. “We think that it is important that it be high enough that there be some cost,” Reish said, “but low enough that it encourages service providers to engage in the process. In other words, it should not be punitive, but instead should encourage voluntary compliance.”

Drinker Biddle takes the position in its recommendation letter to the DOL that a compliance relief program for 408(b)(2) is critical, given that “the regulation is perhaps the most sweeping regulatory change in several decades, requiring service providers in covered arrangements with nearly 750,000 plans providing benefits to about 125 million participants to review and amend their arrangements and disclosures.