By Fred Reish, Esq., and Bruce Ashton, Esq.
Drinker Biddle & Reath LLP, Los Angeles, CA
In July 2011, the U.S. Department of Labor announced a three-month delay in the compliance date for the service provider fee disclosure regulation (the §408(b)(2) regulation). This means that service providers to §401(k) and other retirement plans will have until April 1, 2012, to make the required disclosures to their existing clients regarding their services, fees and fiduciary status. It also means that they can wait until then to implement the disclosure documents and procedures for new clients. (At the same time, DOL announced a five-month delay for calendar year plans to comply with the new participant disclosure requirements.)
Why the Delay?
The fee disclosure requirements were originally released as an "interim final" regulation. In other words, DOL told us they might make changes. The regulation asked for comments on whether a "summary and roadmap" of the disclosures should be required. That is, should service providers be required to briefly summarize the disclosures and, to the extent they use multiple documents to provide the disclosures, should they say what information is provided by those documents and indicate where to look for that information in the documents? Beginning earlier this year, DOL said it was working on amendments to the regulation. In late July 2011, those changes were sent to the Office of Management and Budget (OMB) for the required review. The OMB takes roughly 90 days to perform its review before approving and releasing a regulation. At this point, it will likely be October, or possibly November, before we see the amendments to the regulation.
In its announcement of the compliance delay, the DOL said that it does not anticipate that any further delay will be needed because the changes in the amendment will not require significant additional effort. This suggests that the changes either may not be extensive or may simplify the disclosure requirements, or both. That said, since the DOL has not given any indication regarding what the changes might cover — other than the possible requirement for a summary and roadmap — it is impossible for us to draw any conclusions about their impact.
What's the Impact of the Delay?
Since the release of the interim final regulation in mid-2010, we have worked with a large number of service providers — registered investment advisors (RIAs), broker-dealers, bundled providers, independent recordkeepers and third party administrators — on their disclosure documents and procedures and on drafting compliant service agreements. Many have completed their documentation and updated their procedures and are prepared to make the required disclosures. Even those that have not completed the process are generally well-situated to disclose their services and fiduciary status, but are still working on their compensation disclosures. Nevertheless, the delay will be welcome relief for a variety of service providers, because it will give them additional time to address some of the more complicated issues. Here are examples of what we mean:
What Do We Recommend?
For service providers that have completed the steps necessary to comply or are well on their way to complying, we suggest that they "stay the course." By that, we mean continue the process of preparing for implementation of the disclosure process, but delay full implementation until the amendments to the regulation are published — with two exceptions:
For those that are still working on their compliance documents and procedures, we recommend that they continue to work through the process at the pace they are currently on. We say this because even though the DOL has granted a compliance extension, we believe there is still time pressure to establish the procedures and develop the disclosures needed to comply. For some service providers, there is the practical issue of capturing all of the compensation information and figuring out how to disclose it to each plan client. We have observed that this is more difficult than it may seem and generally takes longer than anticipated. The delay in the deadline gives these service providers time to get ready in an orderly way.
For those that have not examined this issue and begun compliance efforts, the delay may be what saves them from serious problems later on.
For more information, in the Tax Management Portfolios, see Kushner, 361 T.M., Reporting and Disclosure Under ERISA, and Horahan and Hennessy, 365 T.M., ERISA—Fiduciary Responsibility and Prohibited Transactions, and in Tax Practice Series, see ¶5530, Fiduciary Duties and Prohibited Transactions and ¶5570, Reporting and Disclosure Requirements for Benefit Plans.
© Drinker Biddle & Reath LLP 2011
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