Get ready, because here they come. Pending regulations from the Department of Labor require retirement plan vendors to disclose in writing just what services they provide to qualified retirement plan sponsors, and what sorts of compensation they're receiving-including gifts, awards, trips, research, finder's fees, soft-dollar payments, fees deducted from investment returns and other kinds of compensation.

The regulations in question represent just one of three key Labor Department proposals published over the course of the past year, aimed at clarifying the duties of plan fiduciaries and plan advisors and supplying clearer, more accurate information to participants.

So what sets the so-called "reasonable contract or arrangement" fee disclosure regulations, known as 408(b)(2) for short, apart from other new Labor Department proposals? Simple. They put the onus on advisors and other service providers to disclose-by contract or other agreement-exactly what they're getting paid and how. The regulations in question were published in the Federal Register on December 13, 2007. (They can be found at www.dol.gov/federalregister/HtmlDisplay.aspx?DocId=13443&AgencyId=8&DocumentType=1.)

"In the past, the burden was almost entirely on the primary plan fiduciaries to investigate and understand the arrangement between a plan and a service provider and to determine if it was reasonable," says Fred Reish, head of the employee benefits practice at Reish, Luftman Reicher & Cohen, a Los Angeles law firm representing plans and plan fiduciaries in the public and private sector.

Whereas providers may have made such disclosures in the past, now it should be clear what these communications should include, specifically, detailed information about both direct and indirect compensation they receive. The proposed standard will make it incumbent on bundled service providers to disclose all of the services they provide in the bundle, as well as the aggregate direct compensation or fees that will be paid for it-including direct and indirect compensation received by the service provider (and its affiliates or subcontractors) from third parties.

Experts believe that proposed regulation 408(b)(2) will be finalized before the end of this year, meaning the rules could become effective as early as February or March of 2009.

What Must Be Disclosed
Bert M. Carmody, director of fiduciary consulting with retirement plan consultant Fiduciary Risk Management LLC in Atlanta, provides the following example of how it might work:

"Let's assume record-keeper ABC, a bundled provider, supports the XYZ retirement plan, and separately, Joe Smith is the investment advisor to the plan.
"For Joe Smith to 'do it right,'" says Carmody, "he would want to make sure he and his firm disclose all direct fees his company is charging the retirement plan, the compensation Joe's firm received from the bundled provider, and any other compensation Joe Smith receives from ABC's funds or other funds." Furthermore, Joe Smith would need to "insist" that ABC makes fee disclosures of its own.

The fees in question, Carmody says, would include 12b-1 fees, shareholder service fees, sub-transfer agent fees, soft-dollar revenue sharing arrangements and any other compensation that ABC or Joe receives because they are servicing the XYZ plan. "Disclosing only published fees only identifies a small portion of fees charged to the plan."

Why Now?
The regulations show up at a time when lawmakers are speaking out about plummeting 401(k) plan balances and the remarkable lack of transparency when it comes to plan fees.

Just last October, U.S. Rep. George Miller, a California Democrat and the chairman of the House Education and Labor Committee, led a hearing by his committee, and testified that over the past 12 months, more than a half trillion dollars has evaporated from 401(k) plans as a direct result of the crisis in the markets. Miller had been the sponsor of legislation seeking to broaden fee disclosure by plan officials to participants, but the progress of the legislation was postponed last spring by what a Miller spokesman called "partisan roadblocks" and an unenthusiastic White House.

At the October hearing, Miller did not explicitly mention legislation, but he made clear he was worried about the increasing rate of 401(k) plan hardship withdrawals and loans and the fact that "401(k) holders lack critical information about how their money is managed and what fees they pay."

Steps To Be Taken Immediately
There are several steps advisors need to take immediately to prepare for the regulations, says attorney Reish. Not only does 408(b)(2) shift the burden to the service provider, he notes, but the information must be delivered sufficiently in advance of entering into the arrangement to give the responsible plan fiduciary time to review the information before entering into the transaction.

"Failure to fulfill the written agreement and disclosure obligations will cause the service provider's engagement to be a prohibited transaction, which means, at the least, that the service provider will presumably have to pay back any compensation it received and that excise taxes may be imposed on the service provider," Reish says.

Time is of the essence: The Labor Department has said it would provide 90 days for implementation once its regulations are published in the Federal Register, and whereas Reish believes the industry may receive just a bit more lead time, he believes 408(b)(2) regulations could be published well before the end of 2008, and he believes they will be scheduled for implementation by mid-2009.

Reish says financial advisors need to act now and make sure to do all of the following if they really want to be prepared:

Talk to key supervisors, be they broker/dealer or independent RIA representatives, about the disclosures you will need to make in order to comply with 408(b)(2).

Realize you will need a written contract or agreement delivering extensive information on three subjects, namely: the services you are delivering; the fees-both direct and indirect-that you are receiving related to plan services; and any potential conflicts of interest that may arise.

If you aren't entirely sure that your plan sponsor clients will fully comprehend the updated information you're preparing to give them, takes pains to meet with them and explain everything now-before the regulations go into effect.

Employer-Paid Fees
Carmody is blunt about the bottom line. "Advisors and other service providers need to make sure they're disclosing all fees and expenses-including indirect compensation such as revenue from directed trades, custody, revenue received based on plan assets-and insist that their clients' service providers do the same," he says. "While this may be more work, it is a unique opportunity to provide value added to their clients."

Does this apply to those whose clients are employers that pay certain plan fees themselves? Good question. During an Investment Management Consultants Association (IMCA) conference where Carmody spoke last fall, "One person asked whether, in the case where the bundled provider and the investment advisor billed the plan sponsor and the plan [and its participants] was not charged, does he need to offer disclosure?"

The answer is a resounding "yes," Carmody believes, particularly since the assignment of plan fees is frequently a moving target. "In some years, the bill is paid by the employer and other years it is charged to the plan," says Carmody.

"This is an area not fully defined by regulation, but I responded in the affirmative," he says, adding that whether the plan pays or the plan sponsor pays, disclosing all fees is a good thing for three reasons. "First, it provides a strong defense in litigation. Secondly, [advisors'] clients will appreciate it, and thirdly and most importantly, it's the right thing to do.

"We've been saying all along that instead of shunning or avoiding fiduciary responsibility, advisors and service providers should embrace it. This is the culture change that will restore trust in the retirement plan service process."

Plan Sponsor Responsibilities Increase, Too
It's important to keep in mind that the reasonable-contract fee disclosure regulation appears as part of a multifaceted Labor Department effort. This includes the department's so-called rule, "Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans," requiring plan fiduciaries to disclose the dollar amount that each participant pays for administrative services such as accounting and record keeping every quarter.

The Labor Department estimates that those disclosures would save participants $6.1 billion over ten years, including $2.3 billion from lower fees as investment houses become more cost-aware and more competitive. Reish believes that those particular regulations won't take hold until 2010. Members of the private sector have argued strongly that it will take another year at least to get up to speed with all the new rules, he says, and "people can only do so much."

Some 403(b)s Are Impacted
He points out that 403(b)(2) rules technically might apply to defined benefit plans, health and welfare plans, and even individual retirement plans.

Nevertheless, he observes, they were written as though "specifically for 401(k) plans," and 401(k) plan providers will almost certainly have to comply with the 403(b)(2) changes in short order, says Reish.

He notes that providers dealing with 403(b) plans sponsored by tax-exempt organizations and receiving employer contributions (tax-exempt hospitals, for instance) will be subject to the same disclosure rules as 401(k)s, and the same schedule for implementing changes.

On the other hand, 403(b)(2) is a proposal under ERISA, and 403(b) plans not governed by ERISA will not be subject to the disclosure rules.
IRS Rules For 403(b) Plans

As 2008 draws to a close, those working with plan officials of schools and with tax-exempt entities that have 403(b) plans will want to be sure their clients are in compliance with another set of rules-those from the Internal Revenue Service. These new rules state-among other things-that all plans, including non-ERISA plans, adopt a single statement that describes their key components.

"What the IRS has said is that there needs to be one or more pieces of paper that describe to employees what this 403(b) arrangement is all about," explains Bruce Ashton, another attorney with Reish, Luftman Reicher & Cohen. In the 403(b) community, this can be a true challenge because there are usually multiple agreements in force at any one time, often with various annuity providers, which often market directly to participants and issue their own plan descriptions.

Arrangements for 403(b)s must comply with the 2007 regulations beginning January 1, 2009. Model plan language can be downloaded from the IRS's Web site at www.irs.gov/pub/irs-drop/rp-07-71.pdf.