A Heavy Load

Changes in the retirement industry have been bubbling beneath the surface for years. However, with the U.S. Department of Labor’s (DoL) Employee Benefits Security Administration (EBSA) on the verge of finalizing several new rules and regulations, plan advisers must be more aware of these developments than ever before. Some new rules are relatively minor (target-date fund disclosures); others are major (408(b)(2) disclosure rules); and others will be so major (who is a fiduciary?) that the industry may have to wait until 2012 to see anything finalized there.

Target-Date Fund Disclosures 

EBSA released its proposed rule for target-date fund disclosures on November 30, 2010. The proposed rule amends the qualified default investment alternative (QDIA) regulation and the participant-level disclosure regulation. EBSA is recommending new disclosures about the design and operation of target-date or similar investments, including an explanation of the investment’s asset allocation, a graphic illustration of how that allocation will change over time, and the significance of the investment’s “target” date. Public comments reacting to the proposal were accepted until January 14.

Jason Bortz, an attorney at Davis & Harman LLP in Washington, says the proposal has been well-received overall. The one area of concern he sees is that, because managed accounts are a QDIA, they also will be required to have these increased disclosures, which he does not think fit. “Disclosures for TDFs should not be the same for managed accounts; they’re too different. Managed accounts are unique,” says Bortz.

EBSA received comments from 30 concerned parties, ranging from individual consultants and advisers, to organizations such as the American Society of Pension Professionals and Actuaries (ASPPA) and the ERISA Industry Committee (ERIC). Most comments applauded EBSA’s efforts to ultimately help retirement plan participants be better informed about their investments; however, there were a fair number of suggested modifications or additions to the proposal as well.

ASPPA recommended one change of wording in the proposal: Instead of saying that a chart, table, or other graphic representation used to illustrate the glide path must not “obscure or impede” a participant’s understanding, ASPPA thinks it should say the graphic must “be understood by the average plan participant,” which is language used in other EBSA regulations.

ERIC is concerned with information overload for participants, many of whom already are struggling to stay engaged in the investment process: “Although providing concise communications that are comprehensive enough to tell participants everything they need to know is a laudable objective, the reality is that participants making investment decisions should consider a wide array of information—not only about the QDIA, but also about the other investment alternatives. It is not feasible to include all of this information in a single notice; and it is not realistic to expect participants who receive a notice with so much information to read it—let alone process it. Treating QDIAs and TDFs more like other investment alternatives and directing participants to a Web site for more information should demonstrate to participants the breadth of information that they should be considering, without overwhelming them,” ERIC wrote.

Whether these recommendations or any of the others will be adopted into the final proposal is to be seen.

(Cont…)

Transparency of Fees and Expenses to Workers in 401(k)-Type Retirement Plans 

In October 2010, EBSA issued the final rule regarding transparency of fees and expenses to workers in 401(k)-type retirement plans. The purpose of this rule was to assist employees in participant-directed plans with their investment decisions. EBSA stated that current laws do not give participants all the information they need to make informed decisions, nor is the information that is presented to them given in an understandable format.

“This rule provides uniform disclosure to workers about what they pay for investment options in their retirement plans,” said Secretary of Labor Hilda L. Solis, when the final rules were published. “For the first time, workers will have at their fingertips important and accessible investment-related information to comparison shop among the plan options available to them.”

The final regulation requires plan fiduciaries to:

• Give workers quarterly statements of plan fees and expenses deducted from their accounts.

• Give workers core information about investments available under their plan including the cost of these investments.

• Use standard methodologies when calculating and disclosing expense and return information to achieve uniformity across the spectrum of investments that exist in plans.

• Present the information in a format that makes it easier for workers to comparison shop among the plan’s investment options.

• Give workers access to supplemental investment information in addition to the basic information required under the final rule.

As with the target-date fund disclosure proposal, this rule also has been widely accepted by the industry without much controversy, says Bradford Campbell, attorney with Schiff Hardin and former head of EBSA. In fact, this finalized rule should boost business prospects for advisers in 2011. “The good news for advisers is that the ‘burden’ is on administrators; plans will want to hire people to help them comply,” he says.

Specifically, the rule says plan sponsors will have to provide plan-related information and investment-related information to participants, something they will need to be getting from plan providers and advisers, sources say. The plan-related information will have to include details about the “structure and mechanics” of the plan, administrative expenses (such as legal, accounting, and recordkeeping services), and individual expenses (such as fees an individual may incur for taking out a loan or hardship withdrawal from his 401(k)). Participants must receive statements, at least quarterly, showing the actual dollar amount of plan-related fees and expenses charged to, or deducted from, their individual accounts.

The investment-related information includes five parts. Participants must receive historical performance data of investment options; for investment options that do not have fixed rates of return, such as mutual funds, one-, five-, and 10-year returns must be provided. For investment options that have a fixed rate of return, the annual rate of return and the term of the investment must be disclosed. Benchmarking information, fee and expense information, a Web site where participants can get more up-to-date data on investment options, and a glossary of investment-related terms must be included as well.

“All of this will require plan administrators to build new Web sites where workers can get this information—it’s a business decision; who’s going to maintain this site? The broker/dealer? The plan provider?” Campbell says there are a lot of different ways this can be structured, but the rule is not expected to change significantly before it takes full effect on January 1, 2012, so advisers should be making these decisions now.

(Cont…)

408(b)(2) and You  

Not only will plan participants be receiving more information about fees, but so will plan sponsors. On July 16, 2010, EBSA published the “Interim Final Regulation Relating to Improved Fee Disclosure for Pension Plans.” This “interim” final regulation is directed to plan providers and advisers, and addresses how they must improve fee transparency and disclosure with their clients. The interim final regulation is set to take effect on July 16, 2011 (see “Taking Aim” ­PLANADVISER, September-October 2010).

There is one big question looming over plan providers’ and advisers’ heads, sources say: Will we have to issue a summary disclosure statement of all our fees?

The original proposal in 2007 did include a summary disclosure requirement; however, Campbell is surprised that the interim final regulation did not. Whether it will be included in the “final” final, Campbell says it can go either way. “It’s an attractive concept, but the tricky part would be the execution; every investment option has a different fee.” He questions how you put that all into one document.

While it may be challenging for providers to compile such a document, Brian Graff, CEO of ASPPA, believes that the final regulation should include the summary disclosure requirement. In response to EBSA’s request for comments last July, ASPPA wrote, “In order to meet their fiduciary responsibilities under ERISA [Employee Retirement Income Security Act], plan sponsors need to make an ‘apples to apples’ comparison of the fees charged by retirement plan service providers.” If plan sponsors need to provide a chart clearly laying out plan fees and expenses to participants, wouldn’t it be logical for them to be able to make an “apples to apples” comparison, too? Graff noted.

He believes the final regulations will “more likely than not” include the summary disclosure requirement, in which case he believes the deadline would be extended from July 16, 2011, to January 1, 2012. Graff says it will be a challenge for some advisers who have never had to break down their fees before, such as those paid by commission through revenue-sharing plans. If advisers have not been preparing a summary disclosure by this point, Graff believes, “they’re going to be scrambling” this spring. “It is a challenge, no question,” he recognizes.

Campbell suggests that, instead of mandating a summary disclosure, which he says would be too cumbersome for some large practices, he sees the summary disclosure as a marketing pitch. “If it’s not required, but you have such a document, use that as a selling point to new clients,” he recommends.

(Cont…)

Definition of the Term “Fiduciary” 

In October, the DoL proposed regulations that would broaden the definition of a fiduciary under ERISA. “It’s difficult to overstate the potential significance” of this proposed change, says Campbell. “It is an incredibly broad and far-reaching proposal.” Neither he, nor Bortz, nor Graff believes that a final regulation regarding the definition of fiduciary will be issued in 2011—but that doesn’t make it a topic to be ignored (see “Up in the Air,” page 30).

The proposed changes would substantially alter the current five-part test to determine if one is acting as a fiduciary. As it stands now, a financial professional will be held to the fiduciary standard if: 1) he or she gives advice on a regular basis, 2) the advice would serve as the primary basis for investment decisions, 3) the recommendations are individualized for each plan, 4) the party giving the advice receives a fee, and 5) there is a mutual understanding of the nature of the advice.

EBSA is proposing to get rid of two parts: the advice would no longer need to be given on a regular basis—one piece of advice that leads to an investment decision would cause liability—and there does not need to be a mutual understanding; whether the plan sponsor or the plan adviser sees the advice as being given under fiduciary standards, it counts.

The proposal also aims to broaden the definition of what constitutes “advice” to say that advice regarding distribution of plan funds should be held to ERISA standards as well. This would dramatically affect professionals working with individual retirement accounts (IRAs)—a $5.5 trillion industry—who never have worked according to ERISA-fiduciary guidelines, says Bortz. If that were to change, the impact on the countless advisers in the IRA field would be phenomenal, he predicts.

“It’s obvious that the industry has changed dramatically; it’s hard to argue the definition doesn’t need to be updated,” says Graff. “We can certainly expect a great deal of debate during the year,” especially during the public hearings scheduled for March 1. “Disclosures are one thing; it’s a pain in the neck, but it’s doable. This will dramatically change how people do business.” Because it will have such an impact on the industry as we know it, adds Graff, advisers need to be paying attention along the way so they will not be caught by surprise when these changes are enacted.

Even though a final regulation most likely will not be issued until 2012, EBSA has at least brought the issue under the microscope, says Bortz. “People who may not have been working under fiduciary guidelines are starting to think about if they would be able to, or if they even want to, be held to that standard.” Public comments on the proposed changes were accepted until February 3. What EBSA’s next move will be regarding the definition of fiduciary is unknown—but it is something every retirement plan adviser undoubtedly will be anxious to see. —Nicole Bliman