Legacy ERISA Regulation Triggers Fiduciary Acknowledgement and Disclosures from Plan Advisers

By Monte Schatz

The Department of Labor’s fiduciary rule became effective June 9, 2017.  A whole new set of client disclosures will be required for advisers who previously were not operating under the fiduciary standard.  Interestingly, many of these disclosure requirements are not mandated by the fiduciary rule itself, but under a regulation that was part of the Employment Retirement Income Security Act of 1974 commonly referred to as ERISA.

29 C.F.R. § 408(b)(2) requires certain pension plan service providers to disclose information about the service providers’ compensation and potential conflict of interests.   Ironically, this regulation was introduced originally as an interim rule in 2010.  It was published as a final rule on February 3, 2012.  The intent and purpose of the regulation was to assist plan fiduciaries in assessing the reasonableness of compensation paid for services.  Also, the disclosure requirements are designed to assist plan fiduciaries to act prudently and solely in the interest of the plan’s participants by defraying reasonable expenses of administering the plan and avoiding conflicts of interest.

From 2012 to the present day, brokers and other non-fiduciary providers to ERISA retirement plans largely didn’t disclose they were fiduciaries.   However, with the institution of the fiduciary rule the status of those types of advisers have been elevated to the fiduciary standard which triggers the new disclosure requirements.  This subjects those groups to covered provider status.  The three major categories of covered service providers include:

(1) fiduciary investment managers and advisors,

(2) record keeping platforms and broker/dealers, and

(3) providers of other types of services that also receive revenue sharing payments                   or other “indirect” compensation other than from the plan or plan sponsor

The groups that fall under the provisions of 408(b)(2) must provide updated disclosures to plan fiduciaries within 60 days from the date of which the covered service provider is informed of such a change in status.   The 60 day standard is vague as it doesn’t define whether it is June 9^th, 2017 or if the 60 days begins to run from the first day an adviser makes an investment recommendation post-June 9^th.   The general consensus is to take the conservative approach and commence providing updated disclosure immediately and assume the 60 day clock runs from June 9^th, 2017.

For advisers who previously have operated under the fiduciary standard the 408(b)(2) requirements will be “business as usual”.  For those advisers that are new to the fiduciary standard it is imperative that they provide the required disclosures in a concise and understandable one page format.   Previous plan adviser agreements that placed disclosures in multiple documents will no longer satisfy the disclosure requirements that are a critical part of the fiduciary rule.

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SOURCES:

http://www.investmentnews.com/article/20170608/FREE/170609941/the-disclosure-401-k-advisers-may-be-missing-under-the-dol-fiduciary?utm_source=Morning-20170609&utm_campaign=investmentnews&utm_medium=email&utm_visit=655100

http://www.investmentnews.com/article/20120202/FREE/120209978/labor-department-unveils-kinder-gentler-fee-disclosure-regs

http://webapps.dol.gov/federalregister/PdfDisplay.aspx?DocId=25781