Retirement Watch

Financial advice-givers beware

If you want to help retirement plan participants, note some rule changes

Feb 1, 2009 @ 12:01 am

By Jeffrey S. Ashendorf

While market performance is likely to dominate retirement plan discussions in 2009, let's not lose sight of several important regulatory proposals and rule changes that will affect plans this year.

The most significant of these involve investment advice, disclosure of investment-related fees and disclosure of service provider compensation.

Regarding investment advice, the Department of Labor last month issued final regulations under which personalized investment advice -- as opposed to general investment "education" -- could be provided to plan participants by fiduciary advisers. Partially as a result of the historic losses that they have experienced recently, plan participants are actively seeking such advice, and more sponsors are providing it.

But since few plan sponsors are competent to provide investment advice themselves, most retain investment professionals.

While participant investment advice represents a new market for financial advisers, those who consider providing the service must be familiar with Labor Department rules. Having thorough knowledge of the rules is wise, but in general, investment advice must be formulated by applying generally accepted investment theories, be tailored to the participant's particular circumstances and needs, and must take into account the investment alternatives offered under the plan.

Moreover, the adviser's fees can not be dependent on the investments that are recommended or made.

In a related development, the Labor Department now requires detailed disclosure of fees and expenses that are charged to a plan in connection with its investments particularly for participant-directed investments in defined contribution plans.

Proposed regulations would require plan sponsors or other fiduciaries of participant-directed plans to report these amounts directly to the participants so that those costs can be factored in when making investment decisions.

For advisers, this means that fee and expense information must be disclosed to the plan sponsor, including 12(b)-1 fees, subtransfer-agent fees and other forms of revenue sharing.

Effective for this year's returns, these fees must be reported in a plan's annual report (Form 5500). Although the 2009 form won't be due until at least July 2010, advisers most likely will have to track or provide fee information during the course of this year.

This may require advisers to modify their systems in order to provide the tracking.

Similarly, the Labor Department has proposed regulations requiring detailed disclosure of all direct and indirect compensation received by a provider for services performed for a plan, including an estimate for those services that are part of a bundled arrangement. If the proposal were to become effective, there also would have to be a written contract with the service provider containing provisions requiring these disclosures to the plan.

If the contract doesn't provide for disclosure, the service provider's arrangement couldn't be considered a "reasonable contract or arrangement," and the service provider's compensation couldn't be considered "reasonable compensation."

Without meeting those two requirements, an arrangement with a service provider couldn't qualify for the "necessary services" exemption from the prohibited-transaction rules. The contract also would have to require that the service provider disclose any conflicts of interest that may exist or may arise in relation to the services being provided to the plan.

Advisers may find it helpful to track that information throughout the year, rather than pulling it all together in 2010.

Because the proposals all would ultimately benefit retirement plan participants, and as President Obama indicated during the campaign that he supports increased fee transparency, it is likely that they will eventually become final in substantially the form in which they were proposed.

The White House directed executive departments and agencies to conduct further reviews of most pending regulations so that they might be approved by an Obama appointee. It also asked departments and agencies to consider extending the effective date of most published regulations that have not yet become effective, such as those involving investment advice, for the purpose of soliciting additional public comment.

Jeffrey S. Ashendorf is a partner in the New York office of Ford & Harrison LLP of Atlanta, where he specializes in the Employee Retirement Income Security Act, retirement plans, employment-related tax matters and executive compensation. He can be reached at

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