401(k) advisers ready for new regulations

The Labor Department this month is expected to introduce its final rule on how retirement plan sponsors will be required to disclose plan fees to participants.

The new rule will require 401(k) plan sponsors to provide plan -participants with more-detailed information on the fees and expenses associated with the in-vestments in their retirement portfolios.

As a result, retirement experts and attorneys said, brokers, investment advisers and others who work with 401(k) plans should prepare themselves to deal with a rise in customer complaints — and more litigation — as participants become more aware of their plan’s costs.

The participant fee disclosure rule is expected to be published in the Federal Register this month and will likely go into effect next October, experts said.

Gloria Della, a Labor Department spokeswoman, said, “The department will be moving forward soon on fee disclosure.”

The Labor Department is ex-pected to move forward this month on two other rules, which are in the late stages of 90-day review periods.

They are expected to expand the definition of a retirement plan fiduciary to include all investment professionals who provide advice for a fee to the plan sponsor, and spell out what specific details 401(k) plan sponsors should disclose about default target date funds to plan participants.

Final versions are ex-pected to be issued by next spring.

Attorneys who specialize in the Employee Retirement Income Security Act of 1974 say that the proposed rules will be game changers for advisers and other financial professionals who work with 401(k) plans.

“Participant fee disclosure and expanding the definition of a fiduciary adviser will have some fundamental impacts on plans and service providers [including advisers],” said Bradford P. Campbell, who is of counsel at Schiff Hardin LLP.

The new disclosure rule, for example, for the first time will give plan participants a concise apples-to-apples comparison between different investment products and show how much they are paying in fees to the 401(k) provider. The rule extends the principle behind a regulation issued by the department in July that requires 401(k) service providers to disclose fees to plan sponsors in greater detail.

“Many participants were just putting money away in some investment the broker had recommended, and they’ll be seeing things for the first time: “How much is the rep making from this?’” said Jason C. Roberts, a partner at Reish & Reicher.

Employers and advisers will need to draw up a process to deal with those complaints, he said.

“It’s going to behoove the [representative] and the plan sponsor to have additional information for participants,” Mr. Roberts said.

For advisory firms that work with retirement plans, another concern is that participants might become so cost-conscious that they base their decisions solely on fees instead of performance.

“We don’t really want to have participants shy away from good investments only on expense reasons,” said Robert Vetere, chief technical officer of Diversified Investment Advisors Inc., which manages $45 billion in assets. “That’s a danger of making sure that the information disclosure is done appropriately so that participants aren’t just making decisions by investing in the lowest cost fund.”

Ms. Della declined to comment on the proposed fee-disclosure rules.

There is considerable uncertainty about the potential expansion of the definition of a 401(k) plan fiduciary.

The current law defines a plan fiduciary as someone who has discretionary authority over the management of the plan, renders investment advice for direct or indirect compensation, or has discretionary authority in administering the plan.

Brokers have been making some investment recommendations without being fiduciaries. For example, they often help employers skim through a roster of fund options.

Although the new rule’s language hasn’t been published yet, observers say that one possibility is that the department will put the “fiduciary” label on anyone who provides investment advice, not just those who are paid for that advice.

Another possibility is that advising on the availability of securities — coming up with a list of suggested funds — would constitute a fiduciary act, Mr. Roberts said. That would make brokers and advisers who provide off-the-cuff advice subject to fiduciary requirements.

“The new regulation is likely to say, “It’s not how you provide the advice, but whether you do.’ And if you do, then that’s a fiduciary [act],” Mr. Campbell said. “Agents and brokers give advice on what plan options to select, but under the old regulations, you’re only a fiduciary if you provide advice for a fee.”

The rule would also affect third-party administrators and small record keepers that don’t have a registered investment advisory component yet provide suggested lists of funds.

QUESTION OF RESOURCES

Firms that have the resources to build out their RIAs to accommodate fiduciary responsibilities and can add to their broker-dealer side to build up non-fiduciary plan services will likely be well-equipped to handle the change, Mr. Roberts said. Services that reps would be allowed to provide without being fiduciaries include encouraging participation and contribution in the plan, and providing education, he said.

But smaller broker-dealers that lack the expertise and money to accommodate plan fiduciaries or support non-fiduciary activities may pull back from the business, Mr. Roberts said.

Perhaps the least controversial of the three rules is the proposal to give fiduciaries guidelines on what they need to disclose to participants concerning target date funds that are qualified default investment alternatives.

Industry experts expect the proposed rule to reflect some of the guidance published last summer by the Securities and Exchange Commission, which called for 401(k) service providers to disclose to participants in their marketing materials how target date funds are constructed, including specific investment allocations along the funds’ glide paths.

“I don’t think it will be that controversial,” Mr. Campbell said. “They’re not trying to change how target date funds operate, but rather they’re educating the participant.”

Still, some anticipate that plan sponsors will have to perform greater due diligence on target date funds, which will require better marketing and communication on the part of providers and advisers.

“We’re telling firms to get the help of plan sponsors to retool their investment policy statements,” Mr. Roberts said. “Take the extra step of dividing various target dates as it relates to participants and look into those default options.”

E-mail Darla Mercado at [email protected].