408(b)(2) Disclosures - What Do You Need to Know? Marcia S. Wagner, Esq.

(b)(2) Disclosures

3 When Are Service Providers Conflicted? Plan sponsor is looking for provider of administrative services. Provider offers two options: ◦ Services ordered a la carte: $10, ◦ Pre-packaged services and menu: $ 4, Plan sponsor may incorrectly conclude pre-packaged option is best for participants. ◦ Doesn’t realize that provider receives “hidden” compensation from funds and fund managers. ◦ Full compensation may be more than $10,000. ◦ Hidden cost is actually shifted to participants. Provider has incentive to steer uninformed clients to more profitable option.

4 Retirement Security Initiative Improving transparency of 401(k) fees. ◦ Administration’s goal is to make sure workers and plan sponsors are getting services at a fair price. ◦ Final regulations issued February 2, ◦ Initial disclosures due July 2, Rationale for 408(b)(2) reg’s. ◦ DOL efforts to educate plan sponsors about 401(k) plan fees started with Nov’ 97 hearing. ◦ Plan sponsors still not asking the right questions. ◦ DOL will now require providers to furnish the fee info sponsors should be requesting.

5 Covered Plans All employee pension plans must receive fee information except: ◦ IRAs ◦ Simplified Employee Pensions ◦ SIMPLE accounts ◦ Legacy 403(b) (no employer contributions after 2008)

6 Covered Providers and Disclosures Covered Service Providers (compensation of $1,000 or more) ◦ Fiduciaries (including ERISA fiduciary, fiduciary of look- through investment, and RIA). ◦ Providers of recordkeeping and brokerage services. ◦ Providers of accounting, actuarial, legal and other professional services if they receive indirect fees. Required to disclose compensation in writing. ◦ Must be provided before entering into contract. ◦ Formal contract not required. ◦ Indirect compensation requires more detailed disclosure. ◦ Service-by-service disclosure of fees is generally not required.

7 Disclosure of Compensation Format and manner of disclosure ◦ Dollar amount, formula, percentage of plan assets, per capita charge, or any other reasonable method. ◦ Whether fees will be billed or deducted and any other manner of receipt must be disclosed. Compensation shared among related parties ◦ Generally, compensation paid to affiliates or subcontractors does not have to be disclosed. ◦ But must disclose if payment flows to related party on transactional basis (e.g., commissions, 12b-1 fees). Special Rules for Platform Providers ◦ Must provide basic fee information for each investment alternative. ◦ Requirement can be met by passing through fund prospectuses if issuer is regulated.

8 Form of Disclosures Disclosure may be provided through multiple documents. Likely format of Disclosure Summary to be required by DOL in future: ◦ 2 column chart ◦ Column 1: direct, indirect, shared compensation, fees and expenses relating to investments. ◦ Column 2: location of items listed in first column.

9 Timing of 408(b)(2) Disclosures Required Deadlines ◦ Disclosure must be made reasonably in advance of starting or renewing services. ◦ Changes to info must be made no later than 60 days after provider becomes aware of change. ◦ Final rule allows recordkeeping platforms and fiduciaries of look-through investments to report changes annually. ◦ Erroneous info will not result in violation if provider has acted in good faith and with diligence. ◦ Errors and omissions must be disclosed within 30 days after coming to light.

10 Prohibited Transactions and 408(b)(2) Regulations If provider fails to make disclosure, plan’s payment of fees is a prohibited transaction. ◦ Disclosure failures can be cured. ◦ Plan must make written request for information, and provider must respond within 90 days. ◦ Refusal or inability to comply with request requires plan fiduciary to notify DOL, and decide whether to terminate service arrangement. Outlook ◦ Effective date July 1, 2012.

11 408(b)(2) Disclosures Practical Implications Providers must furnish detailed fee disclosures by July 2, Vendors, including platform providers, are responding in different ways: ◦ Some are bundling all services (e.g., RIA and B-D), ◦ Some are merely disclosing their own fees, without reference to other providers. ◦ Some providers are subcontracting this disclosure responsibility. ◦ The FA should determine who is responsible for disclosure and who is making which disclosures. Financial advisors can add value by “quarterbacking” to make sure all providers know and make disclosures, and keep their plan sponsors informed as to what they will be receiving and from whom.

408(b)(2) Disclosures Practical Implications Plan sponsors have duty to ensure plan’s fees are reasonable under ERISA. Plans sponsors are likely to need assistance in light of complexity of plan arrangements. Advisors can assist with: ◦ Prudent evaluation of fees, ◦ Negotiating lower fees and/or expanded services, and ◦ Search for alternative arrangements, if necessary. 12

13 408(b)(2) Disclosures - What Do You Need to Know? Marcia S. Wagner, Esq. 99 Summer Street, 13 th Floor Boston, MA Tel: (617) Fax: (617) Website: A