When they are adopted, these guide requirements should make it easier for plan sponsors to find the information they need to assess whether a service arrangement and the compensation are reasonable, Ashton says.
However, covered service providers will have to furnish a separate document that details where the plan sponsor can find required information—“and plan sponsors must know that they are supposed to receive this document,” Ashton tells PLANADVISER.
Ashton stresses that this is crucial information, because if plan sponsors don’t receive the guide along with the required disclosures, they need to ask for it. And if they still don’t get it, that failure has to be reported to the DOL, and the service agreement must be terminated.
Failure to do this, Ashton says, means the plan sponsor fiduciaries have engaged in a prohibited transaction—and could thus be personally liable to restore funds to the plan.
A fiduciary’s need to know what they are required to get from the service provider, and to ask for it if they don’t get it, is not new, Ashton says. But the requirement that service providers give another item of disclosure is new. And fiduciaries must know about this so that they can add it to their checklist of items to look for and ask for, if it is not received, to avoid engaging in a prohibited transaction.
Ashton emphasizes that service providers need to be aware that this amendment to the regulation is going to be finalized. He recommends they begin the process of designing their guide and working with their systems people on the mechanics of populating it and delivering it to prospective clients—possibly the most important step service providers can take.
Registered investment advisers (RIAs) and third-party administrators (TPAs) are unlikely to feel much of an impact, Ashton feels, since they tend to use relatively straightforward service contracts to make disclosures. Recordkeepers and broker/dealers, on the other hand, tend to use multiple documents or very lengthy ones for their disclosures, at least in Ashton’s experience.
“I don’t mean to imply that there is anything wrong with doing this,” he says. “It may simply be necessary because the arrangement between the plan and service provider is complex.” But if they make these lengthy disclosures after the regulation becomes final, Ashton says they will also have to provide a relatively short road map that points out where the disclosures can be found.
Since the DOL has asked for comments on varied issues, service providers should decide if they want to comment. Issues include the page number limitation for when they need to provide the guide, how to provide the specific location: should it be by page number, or section number, or a link on website, if the information is provided electronically? Should there be a link back?
This new requirement will apply only prospectively, says Ashton. “This is not stated explicitly in the proposal, but there is an indication that the requirement will only apply on an effective date in the future, as yet unknown,” he says. There is no indication that the DOL intends for service providers to go back to existing clients to provide the guide. “Service providers may want to comment on this just to get an affirmative response from the DOL that this is the intent.”
A requirement to provide a notice of changes in the disclosures previously made to plans already exists, Ashton notes. “It appears that the amendment to the regulation will require that the service provider also send out an annual notice of any changes to the guide if there have been changes to the disclosures,” he says.
Ashton says that service providers may want to comment on this requirement as well to see if there is a way to avoid duplication of effort on when changed information needs to be sent out.)
The proposal doesn’t seem to have anything especially tricky, Ashton says. “The DOL has gone to great lengths to make it clear that service providers can make the disclosures in any format they want to so long as it gives the plan fiduciaries a clear indication of where to find the information,” he says. “However, if the RIA incorporates its Form ADV by reference in its disclosures, it will probably need to provide the guide.”
The need to do this could trip up some RIAs, he says, who may think they don’t have to do this. Some TPAs that may receive indirect compensation may also be impacted if they use a brochure or other disclosures from a plan provider to disclose this compensation. Ashton points out that they may not realize they will probably be covered by this guide requirement.
Ashton says that some providers could be lulled into thinking they have complied with the guide requirement, because of the reference to an “other specific locator, such as a section.”
“Suppose they refer, in their guide, to a section of a document that is 20 pages long?” Ashton theorizes. “My suspicion is that this won’t be considered by the DOL to comply with the requirement of the reg. The point is that providers will need to be aware of the spirit of the reg, and not just the words.”
Participants will most likely remain unaffected by the requirement, Ashton says. “To the extent the requirement helps their employers to analyze their service providers and potentially negotiate better deals, it may help participants in the long run. But I don’t see any short-term impact, either good or bad,” he says.