Category: Service Providers
The failure of a covered service provider (for example, a broker-dealer, RIA or recordkeeper) to provide adequate 408(b)(2) disclosures results in a prohibited transaction . . . for both service providers and plan sponsors. While the regulation has an exemption for plan sponsors (if they follow certain steps), there is no similar exemption for covered service providers.
One of our concerns about disclosures by broker-dealers (and affiliated RIAs) is that they may not fully appreciate the concept of related parties under the 408(b)(2) regulation.
When a broker-dealer is a covered service provider and contracts with others to provide some of the services, the broker-dealer and those other parties are “related” for purposes of the regulation and its disclosure requirements. In those cases, the compensation of the related party (as opposed to the broker-dealer) must be disclosed if it is (1) transactional or (2) charged against the plan’s investments. In some cases, there may be other required disclosures.
As you know, I have done a series of short articles about overlooked and misunderstood issues for 408(b)(2) compliance. This article continues that series.
In my last article, I discussed our concerns about the lack of awareness of discretionary investment managers concerning 408(b)(2) disclosures. This article addresses another one of our concerns . . . 408(b)(2) disclosures by advisers who refer investment managers and receive solicitor’s fees.
Covered service providers must make their 408(b)(2) disclosures by July 1, 2012—just weeks away. The failure to make those disclosures will cause their agreements with ERISA plans to become prohibited transactions, resulting in re-payments of compensation to the plans, taxes, interest and penalties.
At first blush, it seems like 2012 is the year of plan disclosures and participant disclosures. The 408(b)(2) regulation is effective July 1, 2012, and the 404a-5 regulation follows two months later. However, there is more DOL activity than initially meets the eye.
There is an emerging issue under both the participant and plan disclosure rules concerning the information that must be provided for asset allocation models (AAMs).
It appears that some DOL officials are of the opinion that asset allocation models—at least under certain circumstances—are “designated investment alternatives” or DIAs. If AAMs are classified as DIAs, they are subject to disclosure requirements under both the plan and participant disclosure rules. As a practical matter, it may be impractical or even impossible for recordkeepers, broker-dealers and RIAs to provide that information.
The DOL issued the final 408(b)(2) regulation on February 2, 2012.
Key points are:
The extension of the effective date to July 1, 2012;
The fact that service providers are not required to provide a summary of the disclosures, though the DOL provided a sample “guide” that is not mandatory;
The addition of a requirement to describe the arrangement between a covered service provider and the payer of indirect compensation;
Clarification that electronic transmission of the disclosures is permitted;
Relief from the disclosure requirements for “frozen” 403(b) contracts;
A new requirement that plan sponsors terminate the relationship with a service provider who fails or refuses to provide information on request;
Limited relief for disclosures for brokerage accounts and similar arrangements.
Bruce Ashton and I have drafted a more detailed Alert for our law firm, Drinker Biddle & Reath LLP. That Alert is located at:
All of the service provider disclosures must be made by April 1, 2012. Once the disclosures are made, the focus will shift from service providers to plan sponsors. That is, after plan sponsors receive the disclosed information, they must prudently review and analyze it. In other words, they must engage in a prudent process to evaluate the services and compensation. That will inevitably lead to a benchmarking of service provider compensation.
My partner, Bruce Ashton, and I have written a detailed Alert on that subject for our firm, Drinker Biddle & Reath, LLP. A copy of that Alert can be accessed through the Drinker Biddle & Reath LLP website, at:
Please copy and paste the link into your browser to access the publication.
This is another in the series of articles about the 408(b)(2) disclosures – and the consequences of a failure to comply. This article discusses the legal responsibilities of plan sponsors.
If a service provider fails to make the required disclosures, then under ERISA both the service provider and the plan sponsor (that is, the responsible plan fiduciary) have engaged in a prohibited transaction. The 408(b)(2) regulation provides a procedure where plan sponsors can obtain relief for the failures of service providers; however, there is no similar provision for service providers.
What if the disclosures are made, but are not reviewed by the plan sponsor? Then the plan sponsor will have committed a fiduciary breach . . . since there is an affirmative obligation on fiduciaries to review and evaluate the compensation of service providers.
To take it a step further, what if the … Read More »