Retirement Advisor Council Sees Flaw in 408(b)(2) Review

The Retirement Advisor Council (RAC) issued its commentary following the federal agency’s announcement that it may soon amend 408(b)(2) fee disclosure regulations approved in 2012. That announcement included a request for comment on a proposed rule change to Section 408(b)(2) of the Employee Retirement Income Security Act (ERISA) that would require covered service providers issuing overly complex fee documentation to develop a “guide” or “road map” that could help less experienced clients find relevant fee data (see “DOL Proposes Service Provider Fee Guides”).

In addition to seeking public comment on these fees guides, the DOL said it would soon conduct a series of focus groups among small-plan sponsors—those serving fewer than 100 participants—to determine if these fee guides are necessary. The DOL said it is also interested in assessing the impact of existing fee disclosure regulations more generally, to identify any unanticipated difficulties.

While the RAC says it supports the DOL’s intelligence-gathering effort, it warns that only sampling small-plan sponsors for focus group research will lead to flawed results that may under-represent the concerns of large-plan sponsors—who are, the council says, far more influential than small-plan sponsors when it comes to retirement readiness in the U.S. That is because, while plans with fewer than 100 participants represent a substantial percentage of the total number of retirement plans, participants of plans in this segment make up only a fraction of the total number of participants in all U.S. plans. In other words, while there are fewer large plans, their expansive size means they represent far more participants than the small-plan segment.

To address this, the RAC recommends that DOL investigators take the opposite approach and focus review efforts on the so-called mega-plan segment, stratifying the focus group sample to over-represent plans with more 1,000 employees. This approach will better reflect the structure of the U.S. retirement planning system, the RAC argues, and so will provide the DOL with more accurate and insightful data on 408(b)(2)’s successes and failures (see “Fee Guide Proposal Misses the Point, Some Say”).

The RAC argues that the DOL’s proposed methodology for conducting fee disclosure focus groups is flawed in other ways. For example, the RAC points out that the DOL hopes to conduct eight to 10 in-person focus groups in select locations—with seven to 10 sponsors in each group. As an alternative, the RAC argues, it would be more effective for the DOL to conduct fewer, online focus groups while utilizing a nationwide sample.

“Our rationale is that focus groups are qualitative in nature, meant to discern a range of attitudes and behaviors, not their frequency,” the RAC writes. “Quality of the research is less a factor of the number of focus group attendees than of the variety of recruits. Redundancy in observations past the initial four or five sessions makes additional groups wasteful.”

The RAC argues that the digital format is preferable to in-person reviews, as it will allow the DOL to gather input from sponsors outside large metropolitan statistical areas. The digital methodology will also save travel dollars, the council says, and significantly compress the data-collection schedule.

“Internet access among employers in all sectors has become so ubiquitous as to make bias irrelevant,” the RAC observes.

RAC members say they also take issue with the DOL’s intention to focus solely on plan sponsors in the effort to asses 408(b)(2), arguing that sponsors will be unable to give a complete picture of the regulation’s performance thus far. Many sponsors rely almost entirely on the services of a specialist retirement plan adviser to comply with the requirement to regularly and prudently review service provider fees, the RAC says, suggesting it will be necessary to solicit additional input from professional retirement plan advisers whom sponsors have retained in a fiduciary capacity.

“Our experience suggests the feedback you will receive from plan advisers will be more insightful than the opinions of individuals who hired a professional adviser specifically because they personally lack the knowledge and confidence that an expert can impart,” the RAC explains.

To collect information from plan advisers, the RAC recommends the DOL conduct a series of in-depth, one-on-one interviews with advisers serving in various fiduciary capacities—including 3(16), 3(21) and 3(38) fiduciary arrangements, named for the sections under which they are described in ERISA. A series of 20 to 30 interviews using a structured discussion guide will provide the range of consistency and input needed to make informed decisions on changing 408(b)(2), the RAC says.

“Of all the professionals with whom plan sponsors interact, we believe the adviser is the best placed to deliver 408(b)(2) disclosure education,” the RAC says.

The full text of the RAC’s comment letter is available here. A coalition of advocacy groups representing U.S. retirement plan service providers filed its own comment letter last month, available here, which suggests there may be other flaws in the DOL’s fee guide proposal.