Service providers have an additional six months to prepare for plan fee disclosure regulations, and from the looks of it, broker-dealers are going to need all that time to make sure they're up to snuff.
“There are many types of compensation for broker-dealers and they have a tough job going forward,” said C. Frederick Reish, an attorney at Reish & Reicher, a firm that specializes in the Employee Retirement Income Security Act of 1974. “They will get there, but it'll be hard.”
Mr. Reish led a discussion this morning at the American Society of Pension Professionals and Actuaries' annual 401(k) Summit in Las Vegas”
Proposed changes to Section 408(b)(2) of ERISA require service providers to spell out to plan sponsors their fiduciary status, detail the services they provide and disclose compensation. The regulation was originally slated to go effective in July, but has been bumped back to Jan. 1, 2012.
The rule does not apply to individual retirement accounts or to 403(b) government plans, which aren't subject to ERISA.
Though the adjustment hasn't been all that difficult for registered investment advisers and record keepers, which have been on top of the rule since it was first proposed, broker-dealers have a good deal of catching up to do, Mr. Reish said.
“Broker-dealers can't identify all of the plans [that would require the extra disclosure]; they have allowed their advisers a tremendous amount of freedom in developing relationships with plans and record keepers,” he added. “There isn't enough time to go over thousands of broker-sold plans and create individual service descriptions by Dec. 31.”
Mr. Reish has created a single set of service descriptions applicable to broker-dealers who aren't acting as fiduciaries. He noted that while the law does not specifically require broker-dealers to state that they're not acting as fiduciaries, many of them have inserted clauses that spell that out, at least to protect themselves in the event of litigation.
Mr. Reish expected the Labor Department to release an addendum to its plan fee disclosure regulation within the next 60 to 90 days, requiring plan service providers to share with plan sponsors a summary of their services and compensation, as well as a road map — such as a link to greater disclosures.
Specificity is vital in the summary. “This is about the plan sponsor getting the information they need to reasonably compare the service disclosure to the compensation disclosure and determine if the two together are reasonable,” Mr. Reish said.
As far as splitting out the details of compensation, broker-dealers are also expected to share details on their revenue sharing and commissions, including pay that's split between the registered representative and the broker-dealer.
Mr. Reish noted that some firms, particularly those whose representatives are independent contractors, work on progressive splits, awarding a greater share of compensation to brokers whose sales figures are sales. All those details will have to be revealed to plan sponsors, he added.
While coming up with the plan fee disclosures will be inconvenient for firms, it seems worthwhile to make the same disclosures to 403(b) plans, even if those plans don't fall under ERISA, Mr. Reish said. “It's a burden to get there, but once you're there, do it for all of them,” he added. “Disclosure is an effective risk management tool for you.”