Category Archives: service providers

Interesting 408(b)(2) Disclosure Issues


408(b)(2), fiduciary, plan sponsors, prohibited transaction, registered investment advisers, service providers

This is another in a series of emails about interesting issues related to 408(b)(2) disclosures. Since we are doing a considerable amount of work helping service providers comply with 408(b)(2), we have run across a number of less common, or even unusual, situations where the rules may—or may not—apply.

Occasionally, retirement plans invest in partnerships, limited partnerships and LLCs. As a general rule, if 25% or more of a class of equity interest in the entity is held by “benefit plan investors,” the entity is deemed to hold plan assets. As a result, the managing partner will be a fiduciary under ERISA’s rules (similar in concept to a collective trust, in the sense that the assets are held outside the plan, but nonetheless constitute plan assets). In those cases, the managing partner will be a covered service provider under the 408(b)(2) regulation and must make the required disclosures concerning services, status and compensation. The failure to do so will cause the arrangement to become a prohibited transaction.

On the other hand, if less than 25% of the entity is held by benefit plan investors, the holdings of the entity will not be plan assets and, as a result, the managing partner will not be considered to be a covered service provider. Similarly, under ERISA, the assets in a mutual fund are not considered to be plan assets and, as a result, the investment manager of a mutual fund is not a plan fiduciary and is not a covered service provider.

Interestingly—or perhaps curiously—however, plan sponsors must still report compensation arrangements about non-ERISA entities (such as hedge funds with less than 25% benefit plan investors) and mutual funds on Schedule C to the Form 5500. That creates the odd circumstance where plan sponsors are required to report that information on Schedule C, but unlike the arrangements that are subject to 408(b)(2) disclosures, those entities are not required, at least by ERISA, to provide the necessary information to plan sponsors. In other words, we have a regulatory regime that does not fully integrate.

I make these points for several reasons. First, it may be that some people don’t understand that the Schedule C reporting requirements are slightly different than the 408(b)(2) disclosure requirements. That is, while they are identical in most regards, there are also some significant differences, such as the ones described in this article. Secondly, it is likely that some service providers—perhaps RIAs—are managing investments in partnerships or other entities that could be subject to these rules—but that may not realize it. As a result, anyone who manages investments in an entity that is outside retirement plans, but which accepts retirement plan investments, should work with their ERISA counsel to evaluate their status, both under the fiduciary laws and under 408(b)(2).

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Extension to Compliance Date for 408(b)(2)


408(b)(2), broker-dealers, DOL, service providers

Last week, the Department of Labor (DOL) extended the compliance date for 408(b)(2) to April 1, 2012. While that only gives us another three months (from the current deadline of January 1), it is welcome relief. We have several observations about the extension:

  • Generally speaking, our service provider clients were on course to provide disclosures to their ERISA plans and to modify their intake procedures for new clients. However, they were feeling pressure to complete the work by the January 1 deadline.
  • The pressures primarily related to compensation disclosures. That is, our clients, by and large, have completed the work on the disclosures about services and status. However, the compensation disclosures are complex and often voluminous . . . particularly for broker-dealers and recordkeepers. At this point, the procedures for most of the easier compensation disclosures have been determined. However, work remains to be done on more complex compensation disclosures, for example, brokerage accounts and open architecture compensation disclosures by broker-dealers.
  • It is unlikely that there will be another extension. In its release, the DOL explained that the reason for this extension was that it had not released its final guidance under 408(b)(2) and, as a result, many service providers would need to make additional systems changes once the guidance is published. At this point, that will likely be October or possibly even November, depending on when the amended regulation is sent to the Office of Management and Budget.
  • It appears that the holdup is that the DOL is having difficulty resolving the new “summary and roadmap” disclosure requirements, which we understand is provided for in the amendment. The Department will need to either resolve the methodology for that disclosure or will need to eliminate the provision. We assume it will be the former.

The DOL thinks that the 3 month extension will be adequate because it will not take significant additional effort to incorporate the changes into the work already being done.  This suggests that the changes will either be relatively minor or possibly that some of the changes will make the regulation easier, rather than harder, to implement.

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Overlooked Issues Under 408(b)(2)


408(b)(2), broker-dealers, registered investment advisers, service providers

As we do work for “covered’ service providers to ERISA plans, we have seen a number of issues that we think are “flying under the radar.” As a result, I plan to write a series of short articles, like this one, about those issues.

The first is the “related parties” and “subcontractor” issue. Under the 408(b)(2) regulation, if a service provider pays money to an affiliate or a subcontractor, it may be necessary to separately report that payment. Without going into too much detail, the regulation requires that the payment be disclosed in writing if it is incentive compensation or is charged directly to the investments.

While this can affect several of types of service providers, it occurs most often in connection with broker-dealers. Let me explain. While the large wirehouses may treat their financial advisers (or registered representatives) as employees, many broker-dealers treat some or all of their financial advisers as independent contractors. The independent contractor financial advisers typically receive a percentage of the commission paid to the broker-dealer. In other words, they receive incentive compensation. As a result, the payment to the independent contractor financial adviser must be separately disclosed to the plan.

This could also apply to RIAs—investment advisers—where, for example, an IAR receives part of a solicitor’s fee for recommending an investment manager

The regulation is going to be amended before it becomes effective. As a result, some of the 408(b)(2) requirements could change.

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