In a workshop at the 2013 NAPA/ASPPA 401(k) Summit, Fred Reish, partner at Drinker Biddle & Reath, and Samuel Brandwein, corporate retirement director at Morgan Stanley, took on advisors’ new responsibilities after fee disclosure.
There are two “disclosure regimes” advisors have to comply with, according to the panelists: 408(b)(2) plan disclosures and 404(a)5 participant disclosures.
Under the 408(b)2 prohibited transaction rules, advisors have to “prudently evaluate compensation for covered service providers,” Reish (right) said. If they fail to do so, they’ve committed a prohibited transaction. Sponsors aren’t off the hook, either, if they fail to collect disclosures.
However, in the preamble to the final regulation, the Department of Labor noted that fiduciaries to a plan should at least be able to compare disclosures to the requirements of the regulation and “form a reasonable belief” that they are adequate. Reish stressed the “reasonable belief” part of the regulation. Advisors can’t just trust that covered service providers have fulfilled their disclosure duties. “Sponsors rely on advisors to keep them out of trouble-with-a-capital-T,” he said.
Reish suggested creating a checklist to “establish reasonable belief” that disclosures have been made correctly. First, advisors should determine if any covered service providers have failed to deliver their required disclosures.
Next, in determining whether the disclosures are adequate, Reish referred to the DOL’s stricture that fiduciaries should be able to compare the disclosure with the required regulations. If hidden compensation isn’t disclosed, it’s not the sponsor’s fault, he said.
If fiduciaries find that there are disclosures missing or incomplete, changes must be requested in writing and the covered service provider must comply within 90 days.
Reish noted that the DOL takes a “tough-love” stance regarding these disclosures. If service providers don’t comply with the written request within 90 days, sponsors must fine them and report them to the DOL. Reish said, though, that in most cases he’s seen, service providers typically respond within 48 hours. “Service providers are very aware of having to respond,” he said.
Among the issues plan fiduciaries have to evaluate as part of the disclosures are: reasonable compensation, reasonable costs, adequate or appropriate services and conflicts of interest that are manageable. Reish said sponsors have a duty to monitor their ongoing obligations every three years.
Reish said that in light of the sometimes extensive disclosures sponsors receive, the DOL was considering requiring that service providers provide a guide similar to a table of contents.
Regarding 404(a)5 requirements, Reish noted that while the legal duty to provide participants’ disclosure is on the sponsor, it’s likely to fall to recordkeepers and advisors who are “just stepping up, even though they’re not legally obligated.”