The DOL issued final 408 regulations (b)(2) on February 3, 2012 (see ErisaALERT 2012-03) which included a sample guide to initial disclosures. While not required, the DOL noted that the sample guide may be a useful tool to assist the responsible plan fiduciary. Interim final regulations which preceded the final regulations (see ErisaALERT 2010-11) requested comments on the format of the sample guide. The commenters disagreed on the feasibility of requiring a summary or guide. Given the lack of specific suggestions on how best to structure such a guide, the DOL decided not to include a requirement in the final regulation but indicated that it intended to publish a separate proposal for a guide at a later date.
On March 12, 2014 the DOL issued an Amendment Relating to Reasonable Contract or Arrangement Under Section 408(b)(2) – Fee Disclosure.
Concurrently with the proposed regulations, the DOL issued a Proposed Information Collection Request Submitted for Public Comment: Evaluating the Effectiveness of the 408(b)(2) Disclosure Requirements.
The proposed regulation would be effective 12 months after the publication of a final amendment in the Federal Register. The length of the proposed regulation is quite short while the preamble is lengthy.
Brief summary
The proposed amendment provides that the covered service provider must provide a guide to the initial disclosures unless the information is already provided in a single document or is less than a specific number of pages (comments are requested regarding the specific number of pages that would trigger the need for a guide). The goal of the guide is to provide the responsible plan fiduciary with information that will enable them to “quickly and easily” find the following information:
- Description of services provided to the plan
- A statement as to whether the services are provided as a fiduciary or registered investment advisor
- Direct compensation description
- Indirect compensation description
- A description of any compensation that will be paid among related parties
- Compensation payable upon termination of the contract or arrangement
- A description of all compensation for record keeping services
- A description of annual operating expenses and ongoing expenses
- Contact information for the person or office where the responsible plan fiduciary can obtain more information
The guide must be updated at least annually with any changes.
What is the rationale for the proposed amendment?
Quite simply, the DOL believes that many plan sponsors need help in understanding what they are paying for and that understanding will enable them to negotiate fees with their covered service providers. The DOL believes that small to mid-size employers do not have the resources necessary to understand the lengthy disclosure documents that have been provided by service providers. In addition, the DOL believes that the “appropriate use” of the guide will give responsible plan fiduciaries confidence that they found information necessary to determine whether the plan is paying reasonable fees.
Discussion
Generally, the preamble provides a plain English translation of the regulations. In this case, the preamble provides an interesting discussion regarding the rationale for the guide as well as the DOL assumption regarding cost.
The proposed amendment would require a “sufficiently specific” locator (e.g., page number or section, direct links to the information). Covered service providers are responsible for preparing the guide. A possible approach is for recordkeepers to receive the information from various designated alternative investments and consolidate the information in its own fee disclosure material. Another possibility is that a third party electronic data base may provide the necessary information. The DOL estimates that it will take 7.4 hours to find all the required information! The DOL may be surprised with the reaction it receives from service providers. The technology costs to develop a guide, consolidate the required information and populate the guide on a plan by plan basis might be quite expensive. Comments on the proposed regulation must be received by June 10, 2014 and will be interesting to read.
The DOL may also be surprised with the results of its focus groups with 70-100 responsible plan fiduciaries. The DOL is interested in collecting information relating to a number of items including:
- The role of the responsible fiduciary and whether they were aware of and understood the 408(b)(2) disclosures
- The number of service providers
- Whether the responsible plan fiduciary was able to find information regarding costs and services and if the review of the disclosures had any impact on their decision to hire or retain service providers
- Whether the covered service provider supplied a guide-like summary with the disclosures and
- Whether a guide would be helpful and would they be willing to pay for it
The DOL will use this information to assess:
- The responsible plan fiduciary’s experiences with the 408(b)(2) disclosures
- The effectiveness of the disclosures in helping plan fiduciaries and if the they understood the disclosures and to
- Whether a guide, summary or similar tool would help fiduciaries understand the disclosures
Editorial opinion:
Any tool that will help plan sponsors understand the often voluminous material received from service providers will be helpful. The most important point is that plan sponsors do not outsource their fiduciary responsibilities when they outsource plan administration/investment services. The notion that recordkeeping fees are free is fading if not gone, and that is a good thing. However, the DOL must understand that the programming efforts required to produce a guide, gather the data, populate the fields and then review the populated fields for accuracy may be time consuming given the myriad of investment options afforded 401(k) participants, especially if the investment options are from different fund families.
Note: all links are active as of the date of issuance of this ErisaALERT.
Disclaimer: This material is for the sole purpose of providing general information and does not under any circumstances constitute legal advice and should not be used as a substitute for legal advice. You should seek the advice of counsel when applying the requirements to your plan. For more information on this ErisaALERT contact us by phone at 610-524-5351 and ask for Mary Andersen or 215-508-5629 and ask for Theresa Borzelli.
