After more than four years in the making, the Labor Department's “new” Section 408(b)(2) disclosure rule is finally set to take effect July 1.
Investment advisers, record keepers and just about every other financial services provider you can think of will be required to provide clear and comprehensive disclosure of the services they offer to their retirement plan clients, the compensation they receive and their fiduciary accountability for the work they do.
In turn, plan sponsors will have to obtain, and use, this information in order to meet their fiduciary obligation to enter only into reasonable agreements with service providers, as required under this section of the Employee Retirement Income Security Act of 1974.
The starting place for advisers preparing to comply with the rule can be found in the Feb. 3 release of the Federal Register. And while there are certainly devilish details in the rule, advisers who understand the spirit of the regulations and how to make the disclosures meaningful to plan sponsors could find the new rule to be a business godsend.
The typical adviser simply will comply with the rule. The exceptional adviser, however, will apply the rule strategically to establish himself or herself as an indispensable fiduciary coach. In that role, the adviser is positioned to promote better plan governance, improve outcomes for plan participants, and expand and deepen his or her own business relationships.
In sports, a quality coach brings a deep understanding of the game, the roles of all the players, and the importance of making sure the players tend to the fundamentals in their effort to improve. The coach also needs to earn the trust and confidence of the players. That starts with effective communication and is reinforced by consistent attention to proven processes.
An adviser serving as a fiduciary coach can follow this same three-part approach. The adviser should communicate a call to action, define the role the client is to play and, most importantly, explain how the client can execute his or her responsibilities with increasing proficiency.
Trust and confidence grow as sound fiduciary processes become ingrained in the adviser-client relationship.
To present the call to action and define the plan sponsor's role as they relate to 408(b)(2), the adviser may say something like the following:
“Your job as plan sponsor is to maximize the opportunity for plan participants to retire comfortably. That won't happen unless you pick service providers wisely.
“To do that, you have to at least know what services you are going to get, what those services cost and whether the people you rely upon most are legally obligated to serve the same goal as you — namely, serving the best interests of the plan participants as a fiduciary.
“If you make sure the services you contract for are what the plan needs [and] are provided at a reasonable cost relative to other comparable choices, and you have considered whether the providers are appropriately accountable for their work, then you have accomplished what is required by this new rule. Better yet, you have helped improve your employees' retirement outlook.”
The explanation of how plan sponsors can make sure they consistently attend to their fiduciary duties might start something like this:
“Under the new rule, you need to demonstrate attention to your service provider selections on a continuing basis. You must consistently require service providers to give you the required disclosures, evaluate that information and terminate those who can't or won't give you the information you need. But keep in mind that your overall obligation is to maximize the opportunity for participants to succeed in retirement. Service provider selection is an important part of making this happen, but you have other fiduciary duties to attend to, as well.”
This sets the stage for the adviser /coach to transition seamlessly to a discussion of the adviser's own 408(b)(2) disclosure. If the adviser's business is structured properly, the disclosure obligation allows the adviser to showcase the services he or she offers under conflict-free compensation arrangements and with fiduciary accountability aligned to the sponsor's.
To further distinguish the adviser from competitors, the service summary could include fiduciary support capabilities such as formal assessment of the sponsor's fiduciary processes and specific guidance on how to address any shortfalls.
It is hard to imagine a better way to inspire trust and confidence than to model and coach fiduciary practices that define trustworthy conduct.
Blaine F. Aikin is chief executive of fi360 Inc.
