408(b)(2) Poses Concerns For B/Ds, Small-Plan Advisers

Some industry experts are concerned that covered service providers will misinterpret the Department of Labor’s (DoL) 408(b)(2) regulation guidance about using ranges to estimate indirect compensation.  

The interim regulation required that covered service providers give the responsible plan fiduciary a description of all indirect compensation. When a broker/dealer provides a brokerage account for a plan, the broker/dealer almost always receives indirect compensation for the investments. In some cases, there may be hundreds of possible compensation arrangements, according to Fred Reish, the chairman of the financial services ERISA team at Drinker Biddle & Reath LLP.

The problem, Reish said, is that broker/dealers cannot possibly know, in advance, the compensation arrangements under which it will be paid.The final regulation, released February 2, 2012 (see “DoL Issues Final Rule on 401(k) Fee Disclosure“), made several clarifications to the fee disclosure requirements including a statement permitting the use of estimates and range of fees.

“The final regulation provides tremendous relief, in my opinion, to broker/dealers,” Reish told PLANADVISER, but added that he is concerned covered service providers will still misinterpret the DoL’s guidance about ranges. Broker/dealers may provide a range of fees so broad that it negates the purpose of the DoL’s regulation, Reish said.

“They have to be realistic [with the ranges],” Reish said. “And I’m worried that people are going to forget that part.”

Reish also thinks additional guidance from the DoL is needed about how and when change disclosure notices are required. For instance, when the responsible plan fiduciary selects an investment, does the broker/dealer need to give the fiduciary a change of disclosure if it is outside of the initial disclosure range? 

“It’s conceivable someone else has a different interpretation, but that’s mine,” Reish said. “People are going to have to, you know, make decisions about that because the guidance from the DoL isn’t specific enough.”


Roberta Ufford, principal at Groom Law Firm, said she agrees brokers must be cautious if they elect to state a range of fees. Ranges rather than specifics make sense for brokerage windows because so many compensation arrangements are possible, but broker/dealers must ensure their range numbers are realistic and standard for the industry.

"When you use a range, it should be appropriate for the circumstance, she said. "[The] DoL intended to provide flexibility [by allowing ranges]  when more specific disclosure would be difficult to provide, and that can be a great thing, but if you’re trying to get a specific answer for when it’s OK to use a range instead of more specific information, there is no specific answer. So you really have to use a good-faith effort here."                        

Ufford thinks the real problem could arise with small-plan advisers who may not have been disclosing detailed information about compensation. Many recordkeepers and other plan services providers already have systems in place to disclose specific indirect compensation because of Schedule C on Form 5500, which has required plan sponsors and administrators to report service provider fees and compensation for plan years beginning in 2009 (see "EBSA Issues Schedule C Fee Disclosure Guidance").

The disclosures that are needed to support Schedule C requirements are similar to information that is required to be disclosed by the new 408(b)(2) disclosure regulations, Ufford said. Schedule C, however, only applies to plans with 100 or more participants. As a result, many advisers to small plans were not affected by the implementation of disclosures required forSchedule C.

"So you can see that, although plan advisers and others have seen this coming, they may not have yet been directly obligated to start delivering information," Ufford said. "Plan advisers who have not yet done so should be looking at their current disclosure materials and procedures and considering how they will comply with the new requirements.  Plan advisers may also want to take a look at how they will support their plan clients, because their plan clients may ask for help them in reviewing the disclosure materials they receive from other service providers covered by the new 408(b)(2) regulation."