Plan sponsor disclosure 101

As of Jan. 1, 2012, most financial professionals who work with retirement plans—including brokers, registered investment advisers (RIA), insurance agents, financial planners and other plan service providers—will be formally required to disclose to their plan sponsor clients the fees they receive and the services they provide. Financial professionals will also be required to state if they are a fiduciary and if so, for which services.

The new requirement applies to both new and existing services arrangements with most retirement plan subject to ERISA. The regulation requires financial professionals to disclose two levels of fees:

• Direct compensation. This is compensation received directly from the covered plan, not from the plan sponsor. It may be a good practice to disclose payments from plan sponsors anyway in the spirit of transparency.
• Indirect compensation. This is compensation received from any source other than the covered plan, the plan sponsor, the service provider—meaning you or your firm—, an affiliate or a subcontractor. Indirect compensation would include compensation received from investment options, such as 12b-1 fees and commissions, and compensation received from other service providers, including finder’s fees, gifts and entertainment expenses.

While there is no specific standard for the level of detail for describing services, it would be wise to provide a reasonably detailed description of the services you offer—and the services you will not provide.

Step #2: Find out where you—and your clients—stand

Next, review the covered plans for which you provide services. Determine for which plans you’re considered a covered service provider. Also, identify the category (or categories) of covered services you provide. Carefully review any services you may provide as an ERISA fiduciary or an RIA.

Then consider those clients’ current level of understanding when it comes to your fees. Ask yourself questions like, “Do my clients understand how I’m paid? Do they understand how much I’m paid? How do I make sure my clients appreciate the value I bring for the fees being paid? And do they understand whether or not I’m a fiduciary?”

Step #3: Evaluate how your disclosures may need to change

Once you’ve determined which clients will be impacted, it’s time to figure out how your disclosures should change. Keep your business model in mind during this step, as the changes to your disclosures could affect the way you do business.

Step #4: Ask how your firm will handle compliance

If you work with a broker-dealer or a RIA firm, find out how the firm plans on handling compliance. Consider contacting legal counsel for help if you don’t have access to compliance support.

Step #5: Decide how you’ll describe your services—and put it in writing

Finally, determine how you’ll describe your services, and put your service plan in writing. A formal “commitment of services” document is a great way to do this.

An obligation AND an opportunity

Ultimately, thorough disclosure of your services and fees can help you deepen your relationships with existing clients. It can also be helpful as a prospecting tool for engaging new clients, who will clearly understand your fees and service offerings. So get started now—and turn this obligation into an opportunity!

[1] Davis & Harman LLP and Jamey Delaplane are not an affiliate of any member of the Principal Financial Group.