In a conference call with reporters, Assistant Secretary of Labor for Employee Benefits Security Phyllis Borzi said the proposed rule change would update the 408(b)(2) fee disclosure regulations finalized by the DOL in 2012. As they are written today, the 408(b)(2) rules require companies that provide certain financial services to employer-sponsored 401(k) plans to furnish detailed information about those services and the compensation they receive, including data about payments from third parties and revenue-sharing agreements.
The proposed rule change would not impact the types of information service providers must supply to plan fiduciaries, Borzi explained, but rather the way the information is presented in some cases. Currently, fee disclosure rules allow service providers to use existing contracts and other operating documents to provide required disclosures to plan fiduciaries. During the call with reporters, Borzi said this has proved to be somewhat problematic in practice, especially for fiduciaries at small businesses and mid-sized employers, which often lack the internal expertise and funding resources to field and digest fee disclosures made through overly lengthy and complex contractual documents.
To address this challenge, the proposed 408(b)(2) rule change introduces the idea of requiring service providers that issue fee documentation that is overly long or complex to develop a “guide” or “road map” that will help less experienced fiduciaries sift through large amounts of documentation to find relevant fee data.
Borzi said the DOL has not yet developed a specific trigger or maximum length for fee disclosure documents that would force a service provider to develop and circulate such a guide among its plan sponsor and fiduciary clients. She also said the DOL is still considering which format would be best for plan sponsors and participants—either a “guide” to exploring fee data across existing documents or a condensed “summary” that would draw together relevant fee data on a few pages. She is hoping the 90-day public comment period starting March 12 will shed some light on what sponsors and participants would prefer, and what is most tenable for the industry.
Borzi said she has already heard concerns that a summary would not be appropriate, as it could develop into a disincentive for sponsors to take the time to review fee documents first hand—one of the primary goals of the 408(b)(2) regulations finalized in 2012. A summary would also presumably be more expensive for service providers to develop. A guide, on the other hand, would do more to ensure sponsors were engaging effectively with fee documentation while protecting the documentation flexibility that is important to providers.
According to proposed rule-change language, if a guide is required, the covered service provider must direct the fiduciary to the place in the disclosure documents where a fiduciary can find the following:
- The description of services to be provided;
- The statement concerning services to be provided as a fiduciary and/or as a registered investment adviser (RIA);
- The description of all direct and indirect compensation, any compensation that will be paid among related parties, compensation for termination of the contract or arrangement, as well as compensation for recordkeeping services; and
- The required investment disclosures for fiduciary services and recordkeeping and brokerage services, including annual operating expenses and ongoing expenses, or if applicable, total annual operating expenses.
“We do think the 408(b)(2) rule has been a success so far,” Borzi said. “But we also think it can still be improved. This proposal today is designed to address the question of whether a more standardized format for the disclosures is important. We’ve seen more than just a few lengthy and complicated disclosures. Some include too much jargon. Some spread the data out over too many documents or sources.”
Borzi also announced during the call that the DOL intends to conduct approximately 10 focus group sessions with approximately 70 to 100 fiduciaries to small retirement plans—i.e. those with fewer than 100 participants—with the purpose of exploring current practices and the effects of the 408(b)(2) final regulation. During the process, the DOL will seek information about the need for a guide, summary, or similar tool to help responsible plan fiduciaries navigate and understand the required disclosures.
Borzi said the DOL estimates that significant benefits will result from the reduced time needed for fiduciaries to obtain compensation and related information needed to fulfill their fiduciary duties. While the DOL lacks complete data and empirical evidence to estimate the cost for covered service providers to create the guide, the department believes the costs to produce the guide will be less than the benefit derived from providing it to responsible plan fiduciaries.
The DOL's low-range estimate of the cost covered service providers would incur to create their guides is approximately $6.7 million annually and its high-range estimate is $22.2 million annually.
Comments cab be submitted electronically by email to e-ORI@dol.gov or by using the Federal eRulemaking portal at www.regulations.gov.