Category Archives: fiduciary

408(b)(2) and Plan Sponsors


408(b)(2), fiduciary, 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:

http://www.drinkerbiddle.com/resources/publications/2012/
ERISAServiceProviderDisclosuresWhatPlanSponsorsNeedtoDoNow?Section=Publications

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.

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408(b)(2) Disclosures for Related Parties


408(b)(2), broker-dealers, fiduciary, registered investment advisers, 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.

Continue reading 408(b)(2) Disclosures for Related Parties →

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Adequacy of Disclosures


408(b)(2), broker-dealers, DOL, fiduciary, prohibited transaction, registered investment advisers

As we get closer to the July 1, 2012 deadline for 408(b)(2) disclosures, more issues emerge concerning the adequacy of disclosures. Of particular concern is the requirement that the disclosures include both monetary and non-monetary compensation. For example, where a mutual fund family or insurance company subsidizes broker-dealer or RIA conferences for plan sponsors or advisers, there is at least an issue of whether those subsidies should be disclosed to the plan sponsor clients of those RIAs or broker-dealers. Another example is where a mutual fund complex or insurance company pays for advisers to attend conferences.

Continue reading Adequacy of Disclosures →

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When are AAMs Considered DIAs?


404a-5, 408(b)(2), broker-dealers, fiduciary, recordkeeper, registered investment advisers, service providers

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.

Continue reading When are AAMs Considered DIAs? →

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Fiduciary Investment Advice for Participants


403(b), DOL, fiduciary, prohibited transaction, prudent

The DOL recently issued its final regulation on conflicted investment advice to participants. Unfortunately, the scope of the regulation is not well understood. For example, if an adviser does not have any conflicts (that is, if the adviser cannot vary its revenue or that of any affiliates based on the recommended investments), then the adviser does not need to comply with the new regulation. For example, the adviser would not need to comply with the certification or audit requirements. However, if the adviser has financial conflicts of interest and can affect its own revenues (or those of an affiliate), then the adviser must comply with those requirements in order to give fiduciary investment advice to participants.

Together with other attorneys from my law firm, I have written a bulletin on the subject. If you are interested in having further information, please click on the linke below to see a copy of the bulletin:

https://www.faegredrinker.com/en/insights/publications/2011/12/fiduciary-investment-advice-for-participants

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What the 408(b)(2) Changes Mean to RIAs


404a-5, 408(b)(2), broker-dealers, DOL, fiduciary, plan sponsors, recordkeeper, registered investment advisers

Two other Drinker Biddle attorneys (Bruce Ashton and Joan Neri) and I just released a bulletin discussing what changes in the 408(b)(2) final regulation mean to registered investment advisers (RIAs). You can obtain a copy of the bulletin at:

http://www.drinkerbiddle.com/resources/publications/2012/the-final-408b2-regulation-impact-on-rias

While the final regulation clarifies a number of issues and grants an extension of time to comply, it also raises two issues which may come as a surprise to RIAs. The first is that asset allocation models (AAMs) may be treated as designated investment alternatives (DIAs), resulting in a number of disclosure requirements (both under 408(b)(2) and the participant disclosure regulation). The second is that the DOL has interpreted “indirect compensation” very broadly in a way that could require additional disclosures from RIAs. That would apply, for example, where investment providers (like mutual funds) or service providers (like independent recordkeepers or bundled providers) provide financial assistance to RIAs. Once specific example would be a conference put on by an RIA for its plan sponsor clients. Another example would be where an investment provider or a service provider offers “free” services to RIAs for their plan sponsor clients. Both of those issues, and others, are discussed in some detail in the bulletin.

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Finally the Final … 408(b)(2) Regulation


403(b), 408(b)(2), DOL, fiduciary, service providers

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:

http://www.drinkerbiddle.com/resources/publications/2012/finally-the-final-408b2-regulation

 

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Proposed Fiduciary Advice Regulation


broker-dealers, DOL, fiduciary

As you may know, the Department of Labor recently announced that it was going to re-propose its proposed fiduciary investment advice regulation. As background, that proposal was intended to modify the Department’s current regulation that defines fiduciary investment advice . . . and also intended to expand the definition, so that more people would be viewed as providing fiduciary investment advice under ERISA. However, the proposed regulations had a number of serious problems and, as a result, the financial services industry (and particularly broker-dealers and insurance companies), strenuously objected to the proposed changes. Because of those objections, as well as some congressional support of the objections, the DOL has agreed to re-propose the regulation.

If you are interested in understanding the problems with the initial proposal, I have provided a downloadable copy of my current letter to the Department of Labor. The letter includes a discussion of the changes, as well as some of the problems.

June 22, 2011 letter to DOL re Proposed Fiduciary Advice

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