It makes no difference how you're linked in, if your career involves the world of ERISA, you've just finished running the most recent Department of Labor marathon: Section 408(b)(2) regulation. The main objective of section 408(b)(2) is full fee transparency for plan sponsors, participants and beneficiaries. What we haven't heard much about is: How does this affect the service providers? Many advisors primarily focus on sales or client relationships and may not be fully concentrating on the details.
On July 16, 2010, the Employee Benefits Security Administration (EBSA aka DOL) published an interim final rule to take effect April 1, 2012. The new DOL fee initiatives include Covered Service Provider (CSP) Disclosure and Participant Fee Disclosure. As April 2012 approached, most individuals and firms were still unclear as to what exactly the DOL was trying to achieve and how it would be accomplished. In February 2012 the EBSA extended the effective date to July 1, 2012. In the end, the DOL released FAQs which included "good faith effort to comply." The final rule creates specific disclosure obligations to ensure that retirement plan fiduciaries and plan participants and beneficiaries are provided information to make better decisions pertaining to services performed and fees that are incurred.
The first round of the regulation was the CSP Disclosure requirement to be furnished to plan sponsors by July 1, 2012. In short, the rule applies to qualified retirement plans subject to Title 1 of ERISA. Service providers that expect to receive at least $1,000 in compensation must disclose information outlining the services agreed on by both parties, all expenses that will be incurred, and how those expenses will be paid to plan sponsors. Those expenses include not only the CSP fees but any mutual fund expenses that the CSP will receive.
Anyone involved in the ERISA industry has most likely had some conversation regarding the disclosures. While the compliance process was grueling for many, for the most part it appears compliance was accomplished by July 1, 2012. Service providers not in compliance as of July 1, 2012, are subject to the prohibited transaction rules of ERISA section 406 and Internal Revenue Code section 4975 penalties. Some could face a fiduciary breach.
With the dissemination of the Covered Service Provider Fee Disclosure, CSPs have educated employers, executing even greater due diligence; and not all clients are happy. Most employers are grateful to be in a position to be able to offer their employees retirement plan benefits. However, in many situations, employers were not aware that the mutual funds they were offering had front-end or back-end loads. Some had no idea of the high expense ratios and redemption fees. Some plans using annuities were astonished when they learned of the fees charged within the price of the annuity. Service providers often charge for each transaction, each time there is a change to a mutual fund option, and to mail participant statements. Having agreed upon disclosures between plan sponsors and CSPs will assist employers in making informed decisions for their employee benefits. With the new disclosure requirements, plan sponsors are under a greater obligation to fulfill the fiduciary role, or risk incurring penalties.
Round two will provide for participant-level disclosures. According to the DOL Fact Sheet, for calendar year plans, the initial annual disclosure of "plan-level" and "investment-level" information must be furnished to plan participants and beneficiaries no later than August 30, 2012. Some of the information required is, but not limited to, services provided, specific mutual fund information, including any related fees, mutual fund performance, and access instructions to obtain information about investment options. Following the annual disclosure, the first quarterly statement must be provided no later than November 14, 2012, outlining the fees debited from the participant or beneficiaries account from July through September. The sponsor must provide this disclosure at least quarterly thereafter. The DOL provided sample CSP and participant-level disclosures to assist CSPs with compliance.
ERISA mandates "a fiduciary to act with the care, skill, prudence and diligence under the prevailing circumstances that a prudent person acting in a like capacity would use. In addition, the fiduciary must act for the exclusive purpose of providing benefits to participants and beneficiaries and defraying reasonable plan administration expenses as well as discharge their duties with respect to the plan solely in the interest of the participants and beneficiaries." The keyword is "reasonable."
I am 100% in agreement with full fee transparency. It is imperative that clients throughout our industry know what they are getting and what they are paying for those services. As a fiduciary, we obviously have an obligation to do what is in our client's best interests. Any level of transparency that is added to the process makes it easier to demonstrate that we are acting in a client's interest. On the other hand, sellers of high-cost plans will dislike the new regulations showing the participants exactly how much they are paying for the plan. Employers need to know that their employees are being educated to assist them in understanding the investment process and making informed decisions. The new regulations level the playing field by making it easier for plan fiduciaries to compare service providers on an "apples to apples" basis.
Robert Jones is president and CEO of Central Trust & Investment Company. Robert has nearly 30 years of experience in investment management and banking. With more than $4 billion in combined client assets, Central Trust provides investment management, trust, fiduciary and retirement plan services to individuals, charities, and businesses. Central Trust employs more than 100 professionals serving high net worth individuals and families. For more information: www.centrustco.com.