Advisers are ahead of the game on DOL rule compliance

Instead of standing on the sidelines waiting for a number of long-awaited Labor Department rules to take effect, advisers are figuring out how things will change and are wasting no time as they gear up

Instead of standing on the sidelines waiting for a number of long-awaited Labor Department rules to take effect, advisers are figuring out how things will change and are wasting no time as they gear up.

Last week, the Labor Department finally proposed delaying the effective date of its plan fee disclosure rule to Jan. 1, from July 16, a move that it previously had telegraphed. A final regulation on participant advice was sent to the Office of Management and Budget last month, meaning that new rules outlining the parameters under which advisers can give advice to plan participants could be published by early fall.

And a hotly debated proposal that would do away with a five-part test to determine who is a fiduciary, which would apply to 401(k)s and individual retirement accounts, is expected to be in place by year-end.

“Presumably, be it fee disclosure or fiduciary, these rules are going forward in some fashion,” said Robert Wander, president of Wander Financial Services LLC. “On fee disclosure, I’m proceeding as if it already happened.”

Mr. Wander has hired an attorney who specializes in the Employee Retirement Income Security Act of 1974 to help draft service agreements with retirement plans that outline his role as a fiduciary and detail plan fees.

“What I’m trying to do is, take a step forward and have a formal agreement so that the client and I can be party to it,” he said.

Michael Francis, president of Francis Investment Counsel LLC, has approached record keepers, asking for samples of how the companies will spell out fees for plan participants. The deadline for calendar year plans to furnish initial disclosures is April 30, 2012; disclosure via quarterly statements must start by May 15, 2012.

“We want to pre-emptively communicate the quarter beforehand to participants that they should stay tuned — they’ll be getting new information and this is what it will look like,” Mr. Francis said. Record keepers have told him repeatedly they are working on it and seem worried about how they will present the information to participants.

John Wilcox, an adviser with Mayflower Advisors LLC, has been benchmarking vendors’ fees for his retirement plan clients. Some plan vendors are better prepared than others to provide fee disclosure to plan sponsors, he said. Lately, Mr. Wilcox has been asking for administrative and record-keeping fees.

“The department is working diligently to implement regulations that take into account the comments and concerns of interested parties,” said a Labor Department spokesman.

The final plan fee disclosure rule will be sent to the OMB in the next few weeks and is expected to be cleared this summer.

When coming up with compliance strategies, service providers might be confounded by the fact that some of the regulations are related and have to be considered together.

“The definition of “fiduciary’ is certainly impactful in the plan fee disclosure strategy,” said Jason C. Roberts, chief executive of the Pension Resource Institute LLC, a consulting firm for broker-dealers.

DEFINE PROCEDURES

As firms decide whether they will provide fiduciary services or act only in an educational capacity, they need to define their procedures and decide how to disclose those services and fees to their clients, he said.

If the regulation defining a fiduciary ends up covering more activities, then the exemption in the participant advice rule becomes even more valuable to broker-dealers, Mr. Roberts said.

That exemption would permit the use of an unbiased computer model to make fund selections.

Not all the regulatory developments are expected to require immediate action by advisers.

Last year, the participant advice rule stirred up concerns that the computer models used to select funds would be biased toward passively managed funds and against actively managed investments.

The Labor Department said in the rule proposal that a fund’s historical performance is less likely to constitute appropriate criteria for asset allocation. Fees and expenses, however, do count as appropriate measures.

Whether that language remains in the latest version of the rule sent to the OMB is unknown.

“We won’t know until we see the final rule, and hopefully, that will be within the next three to four months,” said Bradford P. Campbell, who is of counsel at Schiff Hardin LLP and a former head of the Labor Department’s Employee Benefits Security Administration.

E-mail Darla Mercado at [email protected].