The Department of Labor’s (DOL) newly proposed 408(b)(2) regulation, which mandates disclosures of compensation and conflicts of interest by plan service providers will, when finalized, require every registered investment advisor (RIAs) to have a written contract with client 401(k) and 403(b) plans explaining the services rendered, the revenue received, and potential conflicts of interest.
The impact of the rule for RIAs will require an “enhanced focus on fees, which will require a more detailed and thorough explanation of the value received for those fees, that is, of the services provided to the plan and participants by RIAs and financial advisors,” says Fred Reish of Reish Luftman Reicher & Cohen in Los Angeles, which specializes in employee benefits law.
But the new rules will be much more onerous for broker/dealers to comply with, Reish says. After analyzing how 408(b)(2) would affect five groups–independent RIAs, broker/dealers, bundled providers, independent recordkeepers, and independent third-party administrators, Reish says he and his colleagues found that independent RIAs were the closest to being in compliance with the new regs while broker/dealers were the least prepared of the five groups. This is interesting, Reish notes, “because RIAs and B/Ds compete directly with each other by providing investment advice and consulting to 401(k) plans.”
Why are B/Ds so far behind? First, B/Ds lack the ERISA-specific advisory agreements that RIAs already have in place. RIAs are “not just taking their regular advisory agreement and using it [with 401(k) plans]; they have ERISA-specific advisory agreements. So they are used to getting an ERISA-based agreement signed by their clients,” Reish says. B/Ds, on the other hand, “generally don’t have an upfront agreement at all with 401(k) plans,” he says. “So one big change [B/Ds will] have is not just having agreements, but ERISA-specific agreements with 401(k) plans where many of them have not done that in the past.” RIAs will have to do some tweaking to their existing written contracts once the new rule takes effect, which is expected to be January 1, 2009, Reish warns. So it’s wise for RIAs to seek legal help and start revising the agreements now, Reish says.