The second category includes providers of brokerage services that make available a platform of investments to a participant-directed individual account plan.

The third category is a catch-all, for any service provider who receives indirect compensation (such as 12b-1 fees or commissions) for a variety of services, including investment consulting, investment brokerage, investment advisory, insurance, and a variety of other services.

Of course, each service provider needs to determine whether it is actually subject to the regulations and thus required to provide service and fee disclosures to its clients. However, the definitions are drawn so broadly that it is difficult to imagine that anyone in the retirement plan industry would not fall into one of the categories of covered service providers. 

Once you determine that you are required to make services and fee disclosures, the next difficult hurdle is how to deliver the disclosure itself. Some service providers have decided that the best place is in the service agreement. This way, the service provider is assured of having provided the disclosures to the client in advance of entering into the agreement, as required by the regulations. However, this poses a number of practical problems.

Service Agreements

First, and possibly most significant, service providers are required to provide disclosures to existing clients as well as new clients. If disclosures are contained in the service agreement, the provider will need to get all of its existing clients to execute new service agreements. As anyone in the industry can tell you, it is difficult, if not impossible, to get clients to re-sign documents. Additionally, many financial advisors don't currently use written service agreements with their clients.

Format of Service Agreements

The next issue to deal with is the format. Many broker/dealers utilize a nationwide team of financial advisors to sell product and service clients. Each of these financial advisors runs his or her own practice, and services and compensation vary. Thus, the broker/dealer is faced with a scenario in which it must provide disclosures to a widespread client base that receives varying services for varying fees. Some broker/dealers are exploring the possibility of creating a generic disclosure for distribution to all clients to solve this problem. However, this may not satisfy the regulations, which requires disclosures that are plan specific. That is, the disclosure to each plan fiduciary must detail the services and fees actually provided to that specific plan.

Service Agreement Distribution

Another significant issue revolves around distribution. A broker/dealer may have very little information on its nationwide clients, which  makes it difficult for the broker/dealer to have confidence that it will be able to deliver accurate, client specific, and timely disclosures. Many broker/dealers have approached recordkeepers for support, which appears to be necessary given the circumstances. The more difficult question is what level of support can the recordkeeper offer, and what should the broker/dealer be comfortable accepting?

It seems obvious that broker/dealers will need to rely on recordkeepers for data concerning mutual clients, including contact information and compensation paid in connection with the broker/dealers' services. However, the broker/dealer may also be tempted to have the recordkeeper actually provide the disclosure on the broker/dealers' behalf. On the surface, this seems like a sensible approach, given the relationship between recordkeeper and mutual clients.  However, the hidden danger here is the prohibited transaction risk to the broker/dealer.

It's important to keep in mind that the disclosures required under the 408(b)(2) regulations are intended to provide sufficient information to ensure that an arrangement between a service provider and a plan is "reasonable." If the arrangement is not "reasonable," the arrangement may be a prohibited transaction. In short, failure to properly provide disclosures could result in a prohibited transaction, and the resulting penalties can be quite costly to the service provider. As such, it's advisable to take ownership of this vital obligation.