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.
408(b)(2) Disclosures for Solicitor’s Fees
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.
ERISA Disclosures for Discretionary Investment Managers
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.
Continue reading ERISA Disclosures for Discretionary Investment Managers
DOL Activity in 2012
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.
When are AAMs Considered DIAs?
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.
Fiduciary Investment Advice for Participants
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:
What the 408(b)(2) Changes Mean to RIAs
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.
Finally the Final … 408(b)(2) Regulation
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
Capturing Rollovers
I have recently written an article on “Capturing Rollovers.” The article discusses the DOL’s guidance on the issues involved in capturing rollovers, both by broker-dealers and RIAs. The article analyzed that guidance and discussed programs for RIAs and broker-dealers. You can download a PDF of the article by clicking on the link below:
http://www.drinkerbiddle.com/files/ftpupload/pdf/CapturingRollovers.pdf
Plan Brokerage Account
This is another in a series of articles about interesting issues related to plan and participant disclosures.
The DOL disclosure regulations for both plan sponsor and participant disclosures are not clear about the treatment of brokerage accounts for a plan (for example, a small profit sharing plan) or for a participant-directed plan (for example, a self-directed brokerage account in a 401(k) plan).
For participant disclosures, the DOL has given informal guidance about the disclosures that must be made to participants . . . and those disclosures are minimal.
However, where a 401(k) plan consists exclusively of individual brokerage accounts, there are practical issues about how to comply with the 404a-5 disclosures generally. Since the brokerage accounts are not “designated investment options,” there are only minimal disclosures which must be made concerning the brokerage accounts. However, where only brokerage accounts are offered, the structure will not ordinarily include a recordkeeper. As a result, the plan sponsor (perhaps in conjunction with a compliance-only third party administrator) must make the non-investment participant disclosures, which includes the general disclosures, the administrative expense disclosures, and the individual expense disclosures – as well as the quarterly statements.
Based on our discussions with broker-dealers, there is a lack of awareness of the requirements for the non-investment disclosures under the 404a-5 participant disclosure regulation. As a result, there will be compliance issues in this scenario.