408(b)(2) - Let's Use the Roadmap Until There's Something Better

The final 408(b)(2) regulation is out. Because of the regulation many sponsors will receive more information in more detail about fees than in the past. Sponsors also will receive a new compliance obligation. They are responsible for insuring that plan providers have appropriately delivered the required information. These are significant changes. 

Included in the regulation is a suggested voluntary roadmap to help plan sponsors identify and locate the fees that the DOL has determined should be disclosed. Help is needed if plan sponsors are to comply with the new regulation. The voluntary roadmap is a step in the right direction, but it falls far short of PSCA's recommendation that disclosure be provided in a single comprehensive document. The DOL has announced that it will issue a proposed rule addressing this critical issue in 2012 and has reserved a section in the final regulation pending the resolution of this issue.  Under the final regulation, covered service providers can provide disclosures by sending a shipment, or several separate shipments, of documents with the statement that somewhere in them can be found the required information.  Of course, we don't think most providers will take this approach, but even one will be too many.

Here is how complying with the new regulations will likely work in practice. The plan sponsor will receive a quantity of information from the plan providers, probably compiled by the plan’s recordkeeper. Imbedded in this information will be detailed fee information that the plan sponsor will be required to identify and evaluate. For large employers this is no problem. They have internal expertise and are advised by the country’s top retirement plan experts. In fact they are already getting this information. For small and medium sized employers the situation is different. Most do not have internal expertise and their advisor, to the extent to the extent they have one, is an expert on investments but not the technicalities of ERISA.  

In short, plan sponsors must review the material they receive so they can determine whether the providers have complied with the regulation. If the sponsor determines that the disclosed information has been reported as required then the sponsor must organize the disclosed information so that it can be properly evaluated.  Identifying, organizing the evaluating the disclosed information not only will take significant time, it will require an understanding of the regulations which these plan sponsors do not have. Some will hire expert assistance at hundreds of dollars an hour to do this for them. Those that try this on their own take a significant risk. If they are audited by the DOL, the DOL auditor will review the disclosure in detail and if the disclosure does not meet the standard or the auditor determines that the sponsor has overlooked something material in the disclosed information when doing the fee evaluation, the sponsor will be penalized by the DOL.

The question is will an owner-manager of an 80 employee firm struggling to remain solvent in the current economic reality be willing to spend the hours necessary to read and evaluate this material? Will they be willing to pay the thousands of dollars necessary to hire a competent evaluation by an expert? If not, what better way to help them than to use the suggested solution provided by the DOL. If the road map accompanies the 408(b)(2) disclosures it will help plan sponsors organize the information in the disclosures so they can more easily perform an appropriate fee review. It will also help them with their new compliance responsibility for insuring that the providers making the disclosures have met the requirements of the new rule.

However, this is not the end of the story. DOL has announced it will undertake a review to determine if the information needs to be organized in a form more easily used by sponsors. PSCA supports a requirement that there be full disclosure in a single written document and will be filing comments to that effect with the DOL.