Category Archives: 408(b)(2)

408(b)(2) Guide and More

The DOL recently issued a proposal to require a 408(b)(2) “guide.” The guide has also been referred to as a roadmap. But I think of it as an index to the disclosures.

This is the DOL’s response to their review of provider disclosures and problems the DOL has seen. The DOL has at least two more significant concerns.

The proposal is that plan sponsors be given a stand-alone guide or index to provide directions to where each of the 408(b)(2) disclosures is found in the disclosure documents. It will only apply where covered service providers use multiple or lengthy documents. As a result, it will primarily impact recordkeepers and broker-dealers (as opposed to other covered service providers, such as RIAs and TPAs).

There is time to comment on the proposal. Hopefully, the comments will enable the DOL to find the “fine line” between meaningful disclosure, on the one hand, and overly burdensome requirements on the other.

But, that’s not the end of the story. I have heard of two other DOL concerns. The first is that some covered service providers are not giving fiduciaries information that specifically applies to their plan. For example, the disclosures might instead provide a list of services or compensation amounts that might or might not apply to a particular plan. The Department’s view is that the disclosures should include only the services and compensation for the plan receiving the disclosures. The second concern is that service providers are using overly-broad ranges to make disclosures. For example, if a service provider were to disclose that the fees will be somewhere between 0% and 5%, the Department would likely take the position that the information was not specific enough to enable the responsible plan fiduciaries to evaluate the compensation of the adviser relative to the services being provided.

That’s it for now. But, be forewarned, there is more to come.

As a footnote to these comments, we anticipate that the DOL will begin their first wave of 408(b)(2) investigations in the second half of this year.

To read the Client Alert I co-wrote on this subject in March 2014, visit the Drinker Biddle website here: DOL Proposed Regulation on 408(b)(2) “Guide” – Impact on Service Providers.


Responsible Plan Fiduciaries and Disclosure Issues

The 408(b)(2) regulation requires that its service, status and compensation disclosures be made to “responsible plan fiduciaries” or “RPFs.” In the rush to make the 408(b)(2) disclosures, most recordkeepers, broker-dealers and RIAs sent their disclosure documents to their primary contact at the plan sponsor. In at least some of those cases, the primary contact was not the RPF. As a result, we added language to our clients’ disclosures to the effect that, if the recipient was not the RPF, the written disclosure should immediately be forwarded to the RPF.

The regulation defines RPF as “a fiduciary with authority to cause the covered plan to enter into, or extend or renew, the contract or arrangement.” In other words, it is the person or committee who has the power to hire and fire the particular service provider, e.g., the broker-dealer, recordkeeper or RIA.

Because of the work involved in making mass disclosures, any inadvertent errors in properly identifying the RFPs may be excusable. However, going forward, it may not be. Because of that, all future agreements, account opening forms, and so on, with ERISA plans should specify that the person signing on behalf of the plan is the RPF. Furthermore, we recommend that service providers obtain the email address and other contact information for the RPFs (and that they contractually require plan fiduciaries to inform them of any changes of the RPFs).

We do that for two reasons. First, as covered service providers bring in new plan clients, the documents need to be executed by the RPFs and the disclosures need to be delivered to the RPFs. Second, the information is also needed for existing clients. Fiduciaries who have already received disclosures, they will need to be provided “change” disclosures in the future within 60 days of any changes. And, it is likely that more requirements will be imposed on service providers in the future and, therefore, providers will need to have an efficient and effective way of communicating with the RPFs.

Now is the time to put these new procedures in place.


DOL Proposed Regulation Sent to OMB

The Office of Management and Budget (OMB) has posted that it received a proposed regulation from the Department of Labor. Unfortunately, it is not the much-anticipated proposed regulation on fiduciary advice. Instead, it is a regulation that addresses the development of a “Guide or Similar Requirement for Section 408(b)(2) Disclosures.”

Even though this is not the fiduciary advice regulation, it could have a material impact on the retirement plan community. We don’t know what the proposed regulation will say—and we won’t know for about three months (when the OMB approves and releases the proposed regulation). However, the DOL has previously given us an idea about their thinking.

When the DOL issued the final 408(b)(2) regulation on February 3, 2012, it included a Sample Guide to Initial Disclosures. The Sample Guide was not mandated, but instead was offered as an aide. The DOL explained, in the preamble to the final regulation: “Although the Department is not adopting such a requirement [for a guide] at this time, the Sample Guide published today may be useful, on a voluntary basis, to covered service providers as a format to assist responsible plan fiduciaries with the required disclosures.”

We have heard that, based on the DOL’s review of 408(b)(2) disclosures, the Department has concluded that plan fiduciaries may, in some cases, have difficulty understanding the required disclosures because of the lengthy, technical and/or multiple disclosure documents that are being distributed. As a result, we believe that the proposed regulation may require a guide (or table of contents) for the 408(b)(2) disclosures.

The Sample Guide provided for the disclosure of information at a detailed level. For example, the Guide had references to page and section numbers in specific documents. For example, under indirect compensation, the Guide provided a number of categories, including one entitled “Compensation ABC will receive from other parties that are not related to ABC (‘indirect compensation’).” The Guide then referred to “Master Service Agreement §3.3, p. 4, and Stable Value Offering Agmt §3.1, p. 4.”

If the DOL’s proposed regulation is similar to the Guide—which it may be, and if, for example, a broker-dealer makes disclosures by delivery of prospectuses, that would require references to each of the mutual fund prospectuses, together with the section and page numbers where the description of 12b-1 fees and other compensation appear. Based on our experience, most covered service providers are not providing disclosures that are that detailed or specific.

In other words, this could be a big change, which could result in additional administrative work and expense.


Anticipated DOL Guidance

The Department of Labor recently issued its agenda for regulatory guidance. Several of the projects will impact retirement plans and particularly 401(k) plans. This email focuses on a DOL project to amend the 408(b)(2) regulation to possibly require that cover service providers furnish a “guide” or similar tool, along with the disclosures. In its description of the project, the DOL states: “A guide or similar requirement may assist fiduciaries, especially fiduciaries to small and medium-sized plans, in identifying and understanding the potentially complex disclosure documents that are provided to them or if the disclosures are located in multiple documents.”

As background, the final 408(b)(2) regulation contain a sample guide. Covered service providers may want to review that part of the regulatory package in order to understand the DOL’s approach. Briefly described, though, that guide would require that, for each mandated disclosure, a covered service provider indicate the section number and page number where the particular disclosure was made. They might be viewed as a one or two page index of exactly where the required information was located. In other words, it is not a summary, but instead a “map.”

It appears that the DOL is concerned that—by using multiple disclosure documents or lengthy or complex documents—service providers may have presented the disclosures in a manner that is difficult for plan sponsors to understand. While the guide would likely benefit plan sponsors, it can impose a significant burden on providers who have used multiple documents and/or lengthy documents to make their disclosures. That would be particularly true where the paragraph numbers and/or page numbers can change from plan to plan. That would also be difficult for covered service providers who refer to other documents, such as a mutual fund prospectuses.

Unfortunately, the DOL description of the project does not indicate whether the requirement will be applied only prospectively or whether it would apply retroactively. If I had to guess, it would be that the DOL would make the application prospective…simply because of the cost and burden of the “re-disclosing” to existing plans.

In any event, the guidance will be issued in proposed form and there will be a comment period. At this point, the DOL has indicated that it is targeting a May date for release.



408(b)(2) Violations and Service Provider Correction Program

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.  Continue reading 408(b)(2) Violations and Service Provider Correction Program


Disclosures for Individual Brokerage Accounts

In DOL Field Assistance Bulletin (FAB) 2012-02R, the Department of Labor explained the disclosures for individual brokerage accounts in participant-directed plans. I am concerned that many broker-dealers have not focused on these new “requirements.” That is true for several reasons, including:

  • So much money and energy have been devoted to complying with the plan disclosure requirements, that is, the 408(b)(2) disclosures.
  • The 404a-5, or participant, disclosure requirements are imposed on plan sponsors, in their fiduciary capacity. Stating this slightly differently, the participant disclosures for brokerage accounts are not imposed on broker-dealers, but instead are placed on the shoulders of the plan sponsors. Since it is not a legal responsibility for broker-dealers, it has not received the same attention as the 408(b)(2) disclosures. However, as a practical matter, plan sponsors will turn to the broker-dealers and insist that they satisfy those disclosure requirements. That seems like a reasonable position, since the information is in the control of the broker-dealers.

The FAB provides detailed information about the requirements. To name a few, there is a requirement for a written description of the brokerage account; there must also be an explanation of any fees and expenses that are likely to be incurred in the brokerage account; and, participants must be provided with statements, at least quarterly, describing the fees and charges, both as dollar amounts and in a narrative form.

My sense is that few broker-dealers are prepared to offer assistance at that level of detail. However, I expect that will change now that the work on the 408(b)(2) disclosures is behind us.


Asset Allocation Models

Based on the DOL guidance in FAB 2012-02, many advisers have concluded that asset allocation models (AAMs) can be offered to plans without the need to treat them as designated investment alternatives (DIAs) and, therefore, without the need to report the performance history, expense ratios, etc., of the AAMs.

Unfortunately, that is an oversimplification and may inadvertently lead to problems under both the 408(b)(2) and 404a-5 regulations.  Continue reading Asset Allocation Models


408(b)(2) and Plan Sponsors

My law firm recently published a bulletin about the responsibilities of plan sponsors, as the “responsible plan fiduciaries,” for reviewing the 408(b)(2) disclosures of covered service providers. A copy of the bulletin can be found at:

While many plan sponsors and almost all advisers understand that fiduciaries must evaluate the compensation of service providers to ensure that it is reasonable, there are other requirements which are less well understood.

For example, there is a requirement that plan sponsors review the disclosures as soon as reasonable to determine whether they have received disclosures from all of the covered service providers and whether the disclosures are complete (that is, whether they include all of the required information). And, it appears that at least part of the review needs to be done by the end of August.

If a plan did not receive disclosures from all of the covered service providers or received inadequate disclosures, plan fiduciaries must request the missing information—in writing. The failure to do so will cause those fiduciaries to be engaged in a prohibited transaction. Furthermore, if a covered service provider does not respond, there are specific steps that fiduciaries must take. Those steps are outlined in our bulletin.

Fiduciaries are required to evaluate the service and status disclosures, in addition to the compensation disclosures. That involves a number of issues, but for the moment, let me mention two. First, one of the status disclosures is whether a service provider is acting as an ERISA fiduciary. However, if a service provider does not expect to be providing services as a fiduciary, it has the option of saying nothing. So, if the 408(b)(2) disclosures do not include a statement of fiduciary status, that means that the service provider does not believe that it is providing fiduciary services. Secondly, the disclosures must be reviewed to determine whether they identify any conflicts of interest. For example, if a service provider would receive higher compensation under one alternative than another, that is a conflict of interest which the fiduciaries must evaluate.

From a risk management perspective, fiduciaries are advised to document those considerations, and their conclusions, in committee minutes.

Take a look at the bulletin. It covers much more than this short article.


Hedge Funds and Prohibited Transactions

In working with broker-dealers and RIAs, I have come to realize that there is some misunderstanding about the application of ERISA’s provisions to investments in hedge funds.

If ERISA plan fiduciaries are given “individualized” advice based on the “particular needs” of the plan (such as asset allocation or non-correlated investments), then the recommendation of an investment in a hedge fund is like any other recommended investment. That is, it can be a fiduciary act by the broker-dealer or the RIA firm. Continue reading Hedge Funds and Prohibited Transactions