AdvisorNews - August, 2012
New DOL Regulations Impact Plan Sponsor
They'll be more involved, more scrupulous in 2012
By Ronald E. Hagan
Mr. Hagan is Chairman of the Fiduciary Standards Committee of Roland|Criss. He can be reached at email@example.com
There have been many articles addressing the Department of Labor's (DOL) new 408(b)(2) and 404(a)(5) regulations, most of which have focused on the rules' impact on retirement plan vendors. Just as advisors must understand the rules' mandates for their role, they also must understand how retirement plan sponsors will be affected in order to provide helpful advice and counsel to their clients going forward. In reality, retirement plan sponsors are inheriting a sea change in their fiduciary role and responsibilities, and many will be seeking assistance to understand and appropriately implement effective practices for compliance. This paper will provide a brief background of the 408(b)(2) and 404(a)(5) rules, strategies plan sponsors may implement for compliance, as well as an overview of how plan sponsors' vendor relationships may be enhanced through these new regulatory mandates.Origination of the Rules: Closing the 'Information Gap'
Over the past three decades, there has been an information disadvantage, what the DOL has termed an 'information gap' in the ERISA market between plan sponsors and their vendors. The DOL researched this information gap concern and produced a public report on its findings in the July 16, 2010 issue of the Federal Register, in which the DOL used pointed language to illustrate the potential danger inherent if the information gap persists between plan sponsors and their service providers.
The two new fee disclosure rules- ERISA sections 408(b)(2) and 404(a)(5)- are the DOL's reaction to these findings and its subsequent effort to minimize the information gap before additional damage is incurred on plan sponsors and, more importantly, their participants. Both rules dictate that vendors adjust how they relay information to plan sponsors and participants in order to become more transparent in communicating their services and related fees. However, the rules impose a hefty new responsibility on plan sponsors- requiring them to become more involved and scrupulous with their vendors in order for these rules to have their intended positive effect on the market.What 408(b)(2) Mandates for Plan Sponsors
The oft-used term 'fee disclosure rule,' referencing the new 408(b)(2) regulation, is somewhat of a misnomer for plan sponsors. The title implies that the primary onus lies on vendors to disclose proper and fair fees to their plan sponsors. This is only part of the rule's dictate. The more important and impactful mandate for plan sponsors is what the rule requires of them after vendors' fees have been disclosed.
Specifically, 408(b)(2) requires the following ongoing actions of plan sponsors (also illustrated in Figure A, below):
- Verifying that they have received the appropriate disclosures from vendors;
- Testing that these disclosures are adequate under the new rule; and
- Determining that the fees provided within the disclosure are reasonable, or fair, given the vendor services rendered.
Previously, the mere receipt of vendors' reports provided plan sponsors with a sense of security regarding their fiduciary duty. Under the new regulation, however, plan sponsors are expected not only to ensure the receipt of their vendors' reports, but also to prove that they reviewed the reports, decided on the adequacy of the reports, and concluded that their vendors' fees are reasonable. Next, we will address the action that plan sponsors can and should take in order to satisfy their revised fiduciary requirements under the new DOL regulation, while minimizing risk and enacting effective stewardship principles.The Key to An Effective Risk Management Approach: 408(b)(2) Audit
Plan sponsors have a variety of choices regarding their approach to fulfilling their duty as primary fiduciaries. They may engage an ERISA Section 3(16) Fiduciary. Such a firm accepts total responsibility for the operation of the plan, which includes such duties as the hiring of service providers, ensuring appropriate and timely filings, and handling disclosures. The 3(16) Fiduciary operates the plan, rather than the plan committee, business owner or board of directors. The 3(16), appoints a 3(38) Fiduciary to be responsible for the management of the plan's investments. The only responsibility of the business owner or board of directors is to select and monitor the 3(16) Fiduciary.
Alternatively, plan sponsors can combine their internal practices with occasional counsel from a 3(16) Fiduciary, or they can choose to undertake all of the responsibility and have annual 'spot-checks' to ensure their practices are prudent and in line with current fiduciary law.
Regardless of the avenue plan sponsors choose for fulfilling their fiduciary duty, the safest way to ensure that they earn the prohibited transaction exemption embedded in the new fee disclosure rule is to have a 3(16) Fiduciary conduct a 408(b)(2) annual audit. Specifically, such an audit examines:
- The consistency of value delivered by the plan's vendors;
- The appearance of any vendor conflicts of interest and their potential harmful effects on the plan or its participants;
- The reasonableness of the plan vendors' fees;
- The effectiveness of the plan vendors' practices; and
- Any areas that fall below the standard as set by ERISA.
Let's explore the audit benefits in more detailClarifying and Updating Vendor Arrangements
While most plan sponsors are familiar with ensuring the receipt of vendor disclosures, many are unfamiliar with testing the adequacy of these vendor documents under the new rule. The first benefit of the 408(b)(2) audit is the vital identification and assessment of existing vendor arrangements. For some plan sponsors who have maintained a longstanding vendor relationship, it is difficult to locate or interpret their original signed contract. Furthermore, many existing vendor arrangements are not defined in writing making compliance with the rule nearly impossible. The audit process enables plan sponsors to fully understand the terms of their vendor contracts, as well as update and revise them, where needed.Illuminating What and How Plan Fees Are Paid
Due to the complex nature of vendor fee structures and service models within the retirement plan industry, it is often difficult to discern exactly what fees are being charged for which services, as well as from where those fees are being extracted. A particularly enlightening discovery during the 408(b)(2) audit often is related to learning the ratio of employer-paid fees vs. plan-paid fees. Although many plan sponsors assume their vendor fees are taken exclusively from the company pocket, there are many arrangements that generate vendor payment directly from plan assets, which translates to a reduced amount of investable assets for plan sponsor participants. One of the most valuable takeaways of the 408(b)(2) audit can be understanding and challenging these unbalanced or unfair plan-paid fees.Analyzing Vendor Value
The most revolutionary offering that is available with the 408(b)(2) audit revolves around garnering a score that assesses a particular vendor's performance. The audit provides plan sponsors with an objective analysis of their vendors' fees based upon a scientific calculation of value (i.e., services delivered vs. fees rendered over the same specific time period). With this calculation, plan sponsors not only are able to view fee trends over a certain amount of time (i.e., 'we have been overpaying in a particular area of our plan for three consecutive years'), but they are equipped with the knowledge of whether their vendor's fees are 'reasonable' as defined by ERISA. This in-depth analysis virtually never has been available to the plan sponsor market prior to 408(b)(2), and is changing the way plan sponsors select and monitor their vendors.Enhancing Positioning for a Department of Labor Audit
A tangible result of the 408(b)(2) audit is that it proves that a plan sponsor is working to adhere to a high level of fiduciary care and comply with the new regulations. The 408(b)(2) audit report stands as firm testimony to a plan sponsor's intention to adequately fulfill fiduciary responsibilities and update policies as needed when regulatory changes occur. The 408(b)(2) audit places in a distinctively advantageous position those plan sponsors that are required by ERISA to obtain an annual CPA's financial audit for their plans.Relief from Breach of Fiduciary Duty
In a strangely seeming 'Catch 22', ERISA prohibits payments from the assets of a qualified plan to a so-called party in interest. Vendors are parties in interest if their compensation is derived from a plan's assets. Effective July 1, 2012, the only relief that plan sponsors may obtain from ERISA's heavy penalty for harboring a scenario that pays vendors from their plans' assets is to document an analysis and conclusion that the vendors' fees are reasonable. If the analysis proves otherwise, additional steps mandated by the new rule are required. A 408(b)(2) provides an unbiased view of vendors' fees, guides a plan sponsor on how to react to the findings, and activates the exemption.Going Forward: Aligning Plan Sponsor and Vendor Intent
The 408(b)(2) rule, no doubt, impinges on both the plan sponsor and vendor communities, requiring from them much more effort and diligence than ever before. For plan sponsors, especially, the fiduciary role can be intimidating, as it typically couples potential liability and changing laws with a lack of in-depth training on fiduciary principles or vendor management skills. To the extent that vendors and plan sponsors can align their focus on stewardship principles and work together toward maximizing stakeholder value, this relationship will grow in trust and prove to be invaluable in the years ahead. Instead of viewing 408(b)(2) as an increased burden, vendors and plan sponsors may view it as an opportunity to mend a relationship that has been misaligned for many years. The information gap served not only as a definitive communication disadvantage between vendors and their plan sponsor clients, but it also decreased the likelihood of building synergy around shared intent and desired outcomes. By generating true transparency around fees and building a shared vision of success, vendors may be able to utilize 408(b)(2) as the catalyst to an enhanced relationship with plan sponsors in 2012 and beyond.
The Day After 408b2 Effective Date: What Happens on July 2, 2012?
May 22, 2012
By: David J Witz, AIF®, GFS™
Fiduciary Risk Assessment LLC
The new 408(b)(2) fee disclosure requirements go into effect on July 1, 2012. For the first time since the inception of the Employee Retirement Income Security Act of 1974, a covered service provider1 (“CSP”) will be required to deliver a written disclosure to the responsible plan fiduciary2 (“RPF”) of their status as a fiduciary, the services they will render, fees charged for services rendered and a description of the arrangement between the payer and the CSP.
Once this information is received, the RPF has an obligation to:
- Read the disclosures,
- Determine if there are conflicts of interest,
- Determine if fees are reasonable, and
- Determine if the disclosures meet the 408(b)(2) regulatory requirements.
Assuming everything is accomplished as required; July 2, 2012 should be uneventful. However, there are three reasons why a fiduciary may find their July 2, 2012 occupied with the preparation of written requests for information from their CSP including:
Failure to Meet the July 1 Deadline:
- The CSP failed to provide any disclosures,
- The CSP provided incomplete disclosures, or
- Additional information is necessary to determine if the contract or arrangement is prudent and/or conflict free.
Although a CSP has the legal obligation to provide complete disclosures, the RPF has the legal obligation to demand the disclosures if the CSP fails to provide them by the due date; otherwise, the RPF becomes party to a prohibited transaction. In other words, a RPF is exempt from any liability associated with a prohibited transaction tied to a failure to meet the 408(b)(2) requirements if the RPF takes action to secure complete disclosures when the CSP fails to provide the required disclosures by the required due date. If the CSP fails to provide the RPF with the required disclosures within 90 days of the request, the RPF must report the CSP to the DOL within 30 days and simultaneously begin the process to replace the CSP as expeditiously as possible.3 According to the regulations, failure to terminate the CSP would be inconsistent with the duty of prudence under ERISA 404(a).4 Although the regulations are silent as to how much time must pass before a RPF inherits liability for the prohibited transaction if the RPF does nothing; it is safe to say that a prudent fiduciary will establish minimal tolerance thresholds when required information is not provided timely by the CSP
To maximize risk mitigation, it is recommended the RPF issue a written request on July 2, 2012 to the CSP that fails to provide the required disclosures on July 1, 2012. The letter requesting the required disclosures does not have to be elaborate.
Again, a fiduciary that fails to take action to secure the required disclosures risks becoming a party to and personally liable for a prohibited transaction tied to a 408(b)(2) disclosure failure.Failure to Provide Complete Disclosures
The preamble to the regulation provides us with the criteria a fiduciary must meet in order to enjoy the protection from participating in a prohibited transaction. According to the DOL, “The Department does not believe that responsible plan fiduciaries should be entitled to relief provided by the class exemption absent a reasonable belief that disclosures required to be provided to the covered plan are complete. To this end, responsible plan fiduciaries should appropriately review the disclosures made by covered service providers. Fiduciaries should be able to, at a minimum, compare the disclosures they receive from a covered service provider to the requirements of the regulation and form a reasonable belief that the required disclosures have been made.” [77 FR 5647-48 (2-3-12)] (Emphasis added)
In other words, a fiduciary must ensure the disclosures are complete. However, to form a reasonable belief such disclosures are complete, the fiduciary should be able to compare the disclosures to the regulations to confirm they are complete.
I think it is fair to say that few employers have internal personnel knowledgeable enough to make that assessment. Of course, when expertise is lacking, a fiduciary has an obligation to seek help from outside experts in order to conduct their fiduciary obligations prudently. The DOL makes this position clear in the preamble as well: "If the responsible plan fiduciaries need assistance in understanding any information furnished by the service provider, as a matter of prudence, they should request assistance, either from the service provider or elsewhere." 77 FR 5636 (Feb. 3, 2012) (Emphasis added)
Again, to protect the fiduciary from personal liability associated with participating in a prohibited transaction, they are best advised to secure a professional that is skilled in the assessment of 408(b)(2) compliance to prepare the analysis necessary to form a reasonable believe that all disclosures are complete.Additional Information is Still Needed!
The new 408(b)(2) disclosures go a long way towards assisting the RPF with their responsibility to ensure that their contract or arrangement with their CSP is reasonable. The new requirements dictate that a RPF receive, what should be, sufficient information to make an informed decision. However, there are two major flaws to the regulation that can only be addressed if additional information is provided by either the CSP or the expert that is assisting with the assessment of 408(b)(2) compliance. FIRST
, the new regulation does not address the issue of relationship. In other words, the disclosure requirements do not assist the RPF with the assessment of conflicts of interest as it relates to the potential family or business relationship between a RPF and CSP. To resolve this potential problem, a RPS should request that all CSPs provide a description of any family or business relationship between them and any RPF that participates in or influences the decision-making process to hire the CSP.
To ensure that a conflict does not occur, a RPF should request from all CSPs a written response to the following: "Please provide a written description of your relationship (family or business) with each responsible plan fiduciary and service provider to our retirement plan. "SECOND
, the disclosures provide a RPF with important information to assess the reasonableness of the contract but not the fees charged for services rendered. In fact, it is possible for a CSP to provide all the necessary disclosures and yet fail to charge a reasonable price for services rendered. Clearly, the regulations stop short of demanding a RPF obtain a benchmarking report or engage in an elaborate Request for Proposal (“RFP”) process but without either approach, how does a RPF determine if fees are reasonable?
The DOL is on record that a RPF does not have to purchase the lowest cost services6\ and the DOL has never issued a formal statement that would preclude a RPF from hiring the most expensive CSP, which seems to indicate that a RPF has the freedom to make a subjective decision if a process was implemented that supports fees are reasonable for services rendered. Both the DOL and the courts have issued opinions that some type of comparative analysis7 is appropriate or even necessary to justify a prudent process. In fact, based on a recent court decision, it is pretty clear that hindsight driven arguments to justify reasonableness will not work in the future. At the same time, there is a growing trend among law firms that support benchmarking as a time saving cost effective method to assess fee reasonableness especially if the benchmarking data base is independent of the CSP rto avoido compromhisicng its objnectiavity. Finally, the RFP process is enhanced when combined with benchmarking which cannot be easily influenced by subje[ctive processes, like an RFP.
Broker-dealers covered under new fee disclosure regs
By Paula Aven Gladych
May 30, 2012
Besides investment managers, broker-dealers also will feel the pinch of fee disclosure regulations when they go into effect July 1.
According to Fred Reish of DrinkerBiddle, the Department of Labor’s 408(b)(2) regulations do apply to broker-dealers because they refer investment managers to plans and receive solicitor’s fees in exchange for that service. They also have to disclose those fees to clients.
“It is common that, when an adviser refers an investment manager to an ERISA plan, the adviser will receive a referral fee, which is called a solicitor’s fee. In most cases, the adviser will receive a fee for the referral that often continues so long as the plan uses the investment manager. Under the securities laws, the adviser provides a solicitor’s fee disclosure statement to the investors,” he said.
Because the adviser provided a service to the plan, it could be interpreted under ERISA that the adviser has become a covered service provider.
Reish believes this is the case because in making the referral, the adviser, both the firm and the individual, are acting as a registered investment adviser and as a representative of the RIA, respectively. An RIA that provides services directly to a plan is a covered service provider. It also “appears that the adviser has provided consulting services (consulting on the selection of service providers) and has received indirect compensation from the investment manager in the form of a solicitor’s fee.
According to DrinkerBiddle, a broker-dealer is still considered a covered service provider, even if he doesn’t do anything for an ERISA plan after July 1. As long as the individual or company continues to receive a solicitor’s fee from the arrangement, he must provide the proper disclosure of that arrangement to the plan sponsor.
DrinkerBiddle issued a client bulletin because it was afraid many broker-dealers would not realize that certain common practices they engage in are covered under the disclosure rules.
“If a covered service provider fails to make timely disclosures, the arrangement becomes a prohibited transaction, resulting in loss of the payments as well as penalties and interest,” the bulletin said.
Insurance companies also need to be aware that their agents may be covered service providers under ERISA because they receive indirect compensation when they provide insurance brokerage services to a qualified plan.
Another critical issue is how to classify who should receive the fee disclosures from stock brokerage accounts. “When plan fiduciaries decide to offer a brokerage account through a specific broker-dealer, the plan fiduciaries are “responsible” for the selection and should receive the disclosures. However, when a participant decides to use the broker-dealer, then the participant becomes the decision-maker about whether and how to use the stock brokerage account,” the report said. “This raises the question as to whether the plan fiduciaries or the participant or both are the ‘responsible plan fiduciaries.’”
408(b)(2) Disclosures for Solicitor’s Fees
Fred ReishPartner/Chair, Financial Services ERISA Team
Date: May 29, 2012
In my last LinkedIn email, I discussed our concerns about the lack of awareness of discretionary investment managers concerning 408(b)(2) disclosures. This email addresses another one of our concerns . . . 408(b)(2) disclosures by advisers who refer investment managers and receive solicitor’s fees.
It is common that, when an adviser refers an investment manager to an ERISA plan, the adviser will receive a referral fee, which is called a solicitor’s fee. In most cases, the adviser will receive a fee for the referral that often continues so long as the plan uses the investment manager. Under the securities laws, the adviser provides a solicitor’s fee disclosure statement to the investors.
From an ERISA perspective, the adviser has provided a service to the plan and, interpreting the 408(b)(2) regulation, the adviser has become a “covered service provider.” That appears to be the case for two reasons. First, in making the referral, the adviser, both the firm and the individual, are acting as a registered investment adviser and as a representative of the RIA, respectively. An RIA that provides services directly to a plan is an “(A)(3) covered service provider” (i.e., it is covered under subsection (c)(1)(iii)(A)(3) of the regulation. In addition, it appears that the adviser has provided consulting services (that is, consulting on the selection of service providers) and has received indirect compensation from the investment manager (that is, the solicitor’s fee). If that is the case, the adviser is considered to be a “(C) covered service provider.”
Regardless of how it is “covered,” the adviser will need, by July 1, to provide written 408(b)(2) disclosures to the responsible plan fiduciary. And, based on language in the preamble to the final regulation, that seems to be true even if no services are provided subsequent to June 30, so long as the adviser (i.e., the RIA) continues to receive the solicitor’s fee. In other words, the Department of Labor has taken the position that the continuation of the payment of a fee may cause the adviser to be treated as a covered service provider on and after the effective date of 408(b)(2), even though all of the services were rendered before July 1.
We are concerned that many advisers may not realize that these situations may be “covered” and that, as a result, the 408(b)(2) disclosures are required. (The solicitor fee disclosure statement the adviser previously provided under the securities laws likely does not satisfy the 408(b)(2) requirements and additional disclosures would be required.) If a covered service provider fails to make timely disclosures, the arrangement becomes a prohibited transaction, resulting in loss of the payments, as well as penalties and interest.
The Checklist for the Ideal 401k Investment Due Diligence Process
By Christopher Carosa, CTFA
April 5, 2012
When you look through the totality of the published content on FiduciaryNews.com, you start to see the due diligence process coming together in a structured manner. What at first appears as nothing more than a series of random dots gentling flowing across the landscape coalesces into an intricate constellation that can stand for the ages (or at least until the 401k plan sponsor revises the plan’s investment policy statement). It’s a wonderful and peaceful sight to the eyes of many beleaguered 401k plan sponsors looking to reduce their fiduciary liability. Rather than ask you to read (or re-read) the entire corpus again, for your convenience, we’ve put together this checklist (and a short explanation of each item):* Documented Selection Process
– Every 401k plan sponsor needs to have a written selection process. One can’t rely on a haphazard approach and still maintain compliance with one’s fiduciary duties. Besides actually putting it in writing, the selection process should contain or utilize several elements, each of which we describe below. * Documented Monitoring Process
– Before the 401k plan sponsor can even add the first fund to the plan’s menu of investment options, it will be wise to define in writing how all selections will be monitored. There’s no sense in getting into a finger-pointing game when it’s too late. State upfront how the plan sponsor will measure and assess the investment options. * Incorporate the Techniques of Behavioral Economics
– We can say this another way: “Avoid the Techniques of Modern Portfolio Theory” but, in doing so, we’ll no doubt upset some apple carts. Still, it’s critical the 401k plan sponsor understand the limitations of investment theories and not underestimate the psychology of plan investors. By incorporating the techniques of behavioral economics right in the selection process, the plan leaves investors with at least one less chance to trip themselves up. * Analyzes at least 10 Critical Parameters
– Once the 401k plan sponsor starts looking into specific mutual fund candidate, it’s helpful to have enough data point for comparison in order to insure a credible comparison. We’ll say the minimum is ten, but it’s not unusual for professionals to look at twenty or more parameters when analyzing mutual funds. * Options in Line with Objectives
– Here the 401k plan sponsor ties the due diligence process directly back to the investment policy statement. This is also where delegating to the wrong adviser can prove difficult. Many advisers still utilize techniques derived from Modern Portfolio Theory (even if they don’t know or admit it). A properly constructed investment policy statement will avoid these devices and instead rely on techniques derived from behavioral economics. If an adviser insists on using Modern Portfolio Theory in contradiction of the investment policy statement, then “Houston, we have a problem.” * Options are Materially Unique
– This represents another difficult challenge. Many naïve 401k plan sponsors insist every investment option regularly yields high returns. In fact, this item, coming from the 404(c) Safe Harbor provision, practically demands options (and their underlying funds) exhibit non-covariant behavior. That means while some funds have spectacular returns, other funds must necessarily have less than spectacular returns (and vice-versa). If all the funds always move in the same direction to the same degree, they’re probably not materially unique. * Review Options vs. Benchmarks
– It’s one thing to define a monitoring process (see above), but it’s another thing to execute that process. This item addresses execution. It goes a step further and implies the monitoring process should have already identified pertinent benchmarks. And by benchmarks, we don’t necessarily mean indexes or even similar funds. Benchmarks might also include plan specific return targets, which leads right to the entry on the checklist… * Uses Consistent Risk/Return Wording
– This is the cousin of “Options in Line with Objective” since this is another source of conflict between vendors, particularly those that continue to use Modern Portfolio Theory vs. behavioral economics techniques. When the plan’s investment policy statement incorporates risk/return wording consistent with behavioral economics, the 401k plan sponsor should not be using an investment consultant that provides reams of statistical data on beta, Sharpe Ratio or any one of a multitude of mathematical artifacts from Modern Portfolio Theory. * Use Industry-Accepted Sources
– This doesn’t mean not to use a vendor’s proprietary system, it just means the vendor’s proprietary system should be using data from industry-accepted sources. Unlike almost any other form of investment product, this is incredibly easy for mutual funds. Mutual funds provide their data to the government on a regular basis and there are firms that compile that data. * Documented Independent Evaluation
– This one goes without saying. Never ask someone selling the product to also evaluate it. Sure they’ll do it anyway, but get a second opinion. Someone without a vested interest in a particular mutual fund family will be more like to both see the warts and tell you about them. Lastly, if any 401k plan sponsors haven’t grasped this concept yet, here it is: Document everything. It’s the only proof they’ll be able to provide the DOL when the auditing regulator comes knocking at the plan sponsor’s door.
So there you have it. Thousands and thousands of words based on dozens of interviews summarized into a ten-item checklist. But, here’s the best part. Due diligence is like a river. It’s constantly moving; hence, constantly changing. Fifteen years ago it was written in the language of Modern Portfolio Theory. Today it is written in the language of behavioral economics. Fifteen years from now…
…stay tuned, stay informed and stay up-to-date. Keep reading FiduciaryNews.com!
401(k) Plan Brokerage Windows and Participant Fee Disclosures
Dear Clients and Other Friends:
The Department of Labor’s Field Assistance Bulletin 2012-02 (“FAB 2012-02”) issued on May 7, 2012 included new participant fee disclosure requirements for brokerage windows and other self-directed brokerage arrangements.* These new requirements may pose a challenge for plan administrators and service providers as they seek to fully comply with the DOL’s participant fee disclosure regulations this year. FAB 2012-02 rules will affect many plans as many 401(k) plans often include brokerage windows or similar arrangements.
* See FAB 2012-02 at the following Web link: http://www.dol.gov/ebsa/regs/fab2012-2.html.
† This letter uses the term “participant” to refer to both plan participants and beneficiaries of deceased participants with respect to initial, annual and quarterly disclosures.
To review, the participant fee disclosure regulations (the “404a-5 regulations”) did not require a brokerage window to be disclosed as a designated investment alternative (“DIA”). DIAs are investment alternatives, such as mutual funds or bank-sponsored collective funds, that are designated by a plan administrator as core investment options that participants may choose from when making investment choices. The 404a-5 regulations require specific disclosures to be made for DIAs, but requested more general disclosures for the brokerage windows. The general disclosures for brokerage windows included descriptions of the arrangement and applicable fees. Until now, plan administrators and service providers have used the general guidance included in the 404a-5 regulations to prepare participant fee disclosures.
Now, FAB 2012-02, Q&As # 13 and 14, include new guidance that provides considerably more detail about brokerage windows disclosures and may require that all participants† receive a full brokerage commission schedule (not just participants who actually use brokerage windows). Disclosures must also include information about trading fee schedules, commissions, minimum balance fees and other expenses relating to the brokerage window. (Similarly, a participant is not required to take a plan loan in order to receive disclosures about the fee and expense information associated with plan loans.) Affected plan administrators and service providers now need to consider whether initial disclosures that were drafted based on the 404a-5 regulation meet the detailed requirements of FAB 2012-02, Q&As # 13 and 14, or, alternatively, the good faith standard of FAB 2012-02, Q&A # 37. As necessary, revised disclosures satisfying the detailed requirements of FAB 2012-02, Q&A # 13, will need to be prepared and used going forward.