More On Legal & Compliancefrom The Advisor's Professional Library
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
- Using Solicitors to Attract Clients Rule 206(4)-3 under the Investment Advisors Act establishes requirements governing cash payments to solicitors. The rule permits payment of cash referral fees to individuals and companies recommending clients to an RIA, but requires four conditions are first satisfied.
The Department of Labor’s Employee Benefits Security Administration on Thursday released its long-awaited final rule on 401(k) fee disclosures, rule 408(b)(2), and in doing so extended the compliance deadline three months to July 1.
The rule requires service providers to furnish information which will enable pension plan fiduciaries to determine both the reasonableness of compensation paid to the service providers and any conflicts of interest that may impact a service provider’s performance under a service contract or arrangement.
Secretary of Labor Hilda Solis (left) said “the common-sense rule that we are finalizing today will shed light on the true costs of 401(k) accounts and ultimately reward those working hard and saving for retirement.” The rule, she said, and its companion participant-level fee disclosure rule, will greatly increase the level of transparency in retirement plans.”
Phyllis Borzi, assistant secretary of EBSA, added during a conference call with reporters, that the businesses that sponsor retirement plans as well as the workers who participate in those plans will now be able to “get better information on associated fees and expenses,” allowing them “to shop around and make informed decisions that will lead to cost savings and a larger nest egg at retirement.”
EBSA told AdvisorOne in early January that it was confident the final rule mandating service provider-to-employer/plan sponsor fee disclosure under rule 408(b)(2) would be out by the end of January–so the department wasn’t far off. But at the time a DOL spokesperson said that the department hadn’t decided to extend the compliance date beyond April 1.
On the conference call with reporters Borzi conceded that service providers needed more time to comply so EBSA extended the date to July 1. Borzi warned, however, that service providers not in compliance as of July 1 will be in violation of ERISA’s prohibited transaction rules and subject to penalties under the Internal Revenue Code.
EBSA said the final rule “requires disclosures of direct and indirect compensation certain service providers receive in connection with the services they provide. The rule applies to those service providers that expect to receive $1,000 or more in compensation and provide certain fiduciary or registered investment advisory services, make available plan investment options in connection with brokerage or recordkeeping services, or otherwise receive indirect compensation for providing certain services to a plan.”
Borzi said plans covered under the final rule include defined benefit and defined contribution plans like 401(k)s, however, it does not cover SEPs, SIMPLES, IRAs or individual retirement annuities.
The department also announced that in the near future it intends to publish for public comment a separate proposal that would require service providers, in addition to providing the required fee and investment expense information, to furnish a guide or similar tool to assist plan fiduciaries in identifying and locating the potentially complex information that must be disclosed and which may be located in multiple documents.
EBSA says that the effective date of the final rule works in conjunction with the compliance date of the department’s participant-level disclosure regulation, 404(a)(5), which requires plan administrators to give workers who direct their retirement accounts in 401(k)-type plans easy-to-understand information in order to comparison shop among the plan investment options available to them.
Due to the extension of the effective date of the final rule announced Thursday, plan administrators for calendar year plans now must make the initial annual disclosure of “plan-level” and “investment-level” information (including associated fees and expenses) to participants no later than Aug. 30, 2012, and the first quarterly statement (for fees incurred July through September) must be furnished no later than Nov, 14, 2012.
The Treasury Department issued the same day proposed guidance on “lifetime income” options for employers on how best to integrate lifetime income products into 401(k)s and other employer-sponsored retirement plans.
Treasury guidance builds on comments received in response to Treasury and DOL’s joint request for information on the desirability and availability of lifetime income alternatives in retirement plans. The guidance, Treasury says, will help Americans meet their need for income during retirement by:
- Encouraging Partial Annuity Options. Retirement plan participants are often confronted with a “cash or annuity” decision upon retirement. Given an all-or-nothing choice, many opt for a lump sum and decline the lifetime income stream because they are unaware they have the option to combine approaches. The proposed regulation changes a regulatory requirement to make it simpler for defined benefit pension plans to offer combinations of lifetime income and a single-sum cash payment. This is designed to encourage more retirees to consider partial annuities, which allow for retirees to receive a steady stream of income for the duration of their lifetimes while also keeping a portion of their savings invested in assets with the flexibility to respond to liquidity needs.
- Removing a Key Obstacle to "Longevity" Annuities. Another proposed regulation expands on the combination approach by removing a regulatory impediment to purchasing a deferred "longevity" annuity. This change would make it easier for retirees to use a limited portion of their savings to purchase guaranteed income for life starting at an advanced age, such as average life expectancy. Annuities of this type would provide an efficient way for 65- or 70-year-olds (or even younger savers) to address the risk of outliving their assets by purchasing a predictable income stream starting at age 80 or 85. Once that risk is addressed, a retiree’s task of generating income from the remaining assets is more manageable because it is limited to a fixed period of time.
- Clarifying Rules for Plan Rollovers to Purchase Annuities and Spousal Protection Rules for 401(k) Deferred Annuities. Two revenue rulings issued Thursday clarify how rules protecting employees and spouses apply when plan sponsors offer lifetime income options under their plans. The first ruling clarifies how the rules apply when employees are given the option to use a single-sum 401(k) payout to obtain a low-cost annuity from their employer’s defined benefit pension plan. The second ruling clarifies that employers can offer their employees the option to use 401(k) savings to purchase deferred annuities and still satisfy spousal protection rules with minimal administrative burdens. Both of these rulings would facilitate the availability of flexible options for employees so that they can better use their 401(k) savings to achieve financial security in retirement.