As most of you already know, 2010 was a banner year for the Department of Labor. In quick succession, the DOL issued three major pieces of guidance related to retirement plans. The DOL provided us with:
- the service provider disclosure requirements under ERISA Section 408(b)(2);
- the participant disclosure requirements under ERISA Section 404(a); and
- proposed changes to the definition of "fiduciary" under ERISA Section 3(21).
All three will potentially impact, either directly or indirectly, each and every retirement plan practitioner. However, due most likely to the timing of the release of these regulations and the relative complexity of the rules, many practitioners are having a hard time sorting out what applies to them.
Let's briefly discuss what this DOL guidance does, and does not, require. In future posts, I will go into further detail about how each of these new regulations work and the associated potential issues.
The regulations under ERISA Section 408(b)(2) require "covered service providers" to retirement plans to disclose the services provided to such plans and the fees charged for such services. There is no requirement under the 408(b)(2) regulations whatsoever regarding the compensation one may receive and what services may be provided. The regulations are only concerned with disclosure and have nothing to do with level compensation, fiduciary status (other than disclosing whether or not one is providing services as a fiduciary), or investment advice to plans or participants.
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The DOL also issued participant disclosure requirements under ERISA 404(a), which require that all eligible participants receive a series of prescribed fee disclosure notices at various points throughout the plan year. Unlike the 408(b)(2) regulations, which require broad ranging disclosures about all direct and indirect costs to the plan, the 404(a) regulations are primarily concerned with fees and services that directly affect the accounts of participants.
A third set of plan-related regulations issued by the DOL propose to revise the current guidelines regarding what types of investment advice would make the advisor a fiduciary. Essentially, this proposed regulation, if finalized in its current form, would make it very difficult for any financial advisor to avoid fiduciary status in the course of advising retirement plan clients.
Even further, the DOL also proposed regulations in 2010 regarding the provision of investment advice to plan participants. Such advice may be provided under the terms of a prohibited transaction exemption contained in ERISA Sections 408(b)(14) and 408(g), which were part of the Pension Protection Act of 2006. Under the proposed regulations, in order to qualify for the exemption, the advice either has to be provided via a computer model or through a "level fee" arrangement, under which the investments selected have no effect on the compensation paid to the fiduciary advisor.
Many practitioners mistakenly believe that the 408(b)(2) regulations, when they take effect on January 1, 2012 (unless an additional extension is provided, which is looking increasingly likely), will make all financial advisors fiduciaries and prohibit them, as fiduciaries from receiving anything other than level compensation from the plans to which they provide services. As you can see, the avalanche of guidance in 2010 has led to significant concern.
If an advisor provides services to a retirement plan, and he or she is a "covered service provider" under the terms of the regulations, no matter what compensation he or she earns for those services, the 408(b)(2) regulations only require the advisor to disclose the amount of compensation he or she receives and the services provided to earn that compensation.
However, if the advisor provides such services as a fiduciary to a plan, depending on the actual services he or she provides, the advisor may need to be concerned about how he or she is compensated for such services.
You have likely heard the terms "3(21) fiduciary" and "3(38) fiduciary" in the past. Essentially, in the context of financial advisors, a 3(21) fiduciary provides investment advice, but the ultimate decision making authority remains with the plan sponsor. A 3(38) fiduciary, on the other hand, receives a full delegation of authority to make all investment-related decisions under the plan. As I will discuss in future posts, 3(38) fiduciaries cannot be compensated in the same manner as 3(21) fiduciaries. As fiduciary liability issues become more prominent, advisors will need to be aware of their exact status and ensure that their compensation is adjusted accordingly.
Please keep in mind that this is only intended to provide a basic overview. These are very complex rules and before you take make any decisions on how to proceed as these new requirements take effect, you should consult with your attorney as to the best course of action for your particular situation.
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