New federal regulations on fee disclosure from providers to sponsors should, for the most part, provide more relief than grief to the industry, defined contribution experts say.
That's because the final regulations, issued in early February, contain few significant differences from the so-called interim final regulations issued by the Department of Labor in July 2010 for Section 408(b)(2) of the Employee Retirement Income Security Act.
In some cases, what industry members call the “final-final” regulations exclude provisions that they had feared. In other instances, some elements of the interim final rules were softened in the “final-final” version, which takes effect July 1.
“In my experience, for most providers, for the bulk of their clients, they will be fine,” said Jennifer Eller, a principal specializing in ERISA law at Groom Law Group, Washington. “Still, there are some unanswered questions because each provider has unique arrangements with certain sponsors.”
And even though the rules create some challenges for providers, DC consultants say pressure will be on plan executives to digest and analyze the information — and then act on it.
“The sponsors will be getting a lot of disclosure documents, so don't put them in a file or throw them away,” counseled Tom Kmak, the Kansas City, Mo.-based CEO of Fiduciary Benchmarks Inc. “Sponsors have to ask themselves: ‘Is this reasonable?'”
Although providers are sending data, “they're not providing any context,” said Donald Stone, managing director and chief investment officer of Plan Sponsor Advisors, a Chicago-based consulting firm. “There's nothing to compare to what your peers are paying.”
Mr. Stone said most record keepers should be able to meet the regulations' July 1 compliance deadline. “Most large vendors have been working on this for a long time, and they will have to tweak what they've already done,” he said.
“Some second- and third-tier players may be scrambling,” said Mr. Stone, referring to smaller record keepers. “Considering all of the delays (by the DOL), they should have been prepared.”
The July 1 deadline represents a three-month extension from an April 1 deadline, which, in turn, was an extension of a Jan. 1 deadline that itself was an extension of the July 2011 compliance deadline originally set by the Labor Department after it issued its interim final regulations.
As the DOL delay in completing the regulations dragged on last year, some record keepers sent disclosure documents to sponsor-clients, figuring they could make any necessary adjustments after the final regulations were issued. Others said they have been providing fee disclosure information for several years that is as comprehensive, if not more so, than what was required by the DOL.
“I'm not hearing anything from people who say it's impossible,” said Brian Graff, executive director and CEO of the American Society of Pension Professionals and Actuaries, Arlington, Va., in reference to the July 1 deadline. ”I don't think anyone will ask for an extension. The industry is going to deal with it.”
However, some DC industry members wonder if everyone will be ready on time. “Because of the delayed compliance date, some service providers have deferred starting the process of preparing the forms and creating the systems needed to comply with the disclosure documents,” said a recent memo sent to clients by the law firm Drinker, Biddle & Reath LLP.
“Some did so to avoid having to make changes and others may have hoped for a more extended delay,” said the memo from Bruce Ashton and C. Frederick Reish, both Los Angeles-based partners and ERISA specialists for the firm. “That is not going to happen.”
When the DOL extended the provider-sponsor disclosure deadline to July 1, it also extended previously enacted regulations affecting fee-disclosure between sponsors and participants under Section 404(a) of ERISA. The deadline for that disclosure is now Aug. 30 rather than May 31.
The biggest sigh of relief from the DC industry came from the Labor Department's decision against requiring providers to include a mandatory summary of fee disclosures sent to sponsors. Instead, the DOL said it “strongly encourages” that providers offer a summary. The DOL published a sample summary with the final regulations, saying it could be used voluntarily by providers.
Many industry members had complained that a mandatory summary was unnecessary, expensive, time-consuming and cumbersome.
“This is very important,” said Larry Goldbrum, the Washington-based general counsel for the SPARK Institute, referring to DOL's avoiding a mandated summary. “We are very happy.”
Adding that SPARK was concerned the DOL would mandate something like its sample summary, Mr. Goldbrum said developing such a document “would be very complicated and very expensive.”
However, the DOL said it would issue a proposed regulation “in the near future,” seeking public comment about requiring a summary statement in providers' fee-disclosure information.
The prospect of a mandated summary created “a lot of angst,” said Ms. Eller of Groom Law Group. “Most providers want to give a fairly straightforward presentation. At least now we have a chance to see what the department is thinking about.”
Some DC industry members wanted the DOL to stress simplicity. “I would hope that, at a bare minimum, the providers will comply with a voluntary summary,” said Edward Ferrigno, vice president for Washington affairs, Plan Sponsor Council of America, Chicago. “We think it's more cost-efficient for providers to offer this rather than have sponsors chase it,” he said, referring to concerns that some plan executives could be overwhelmed by the data sent to them by providers.
Mr. Ferrigno also warned plan executives to remain aware of all responsibilities under ERISA. “Clearly, sponsors can't look at this rule as the sole source of their fiduciary duties,” he said.
Another break for providers was DOL's allowing them to identify to clients changes in investment-related information annually rather than the interim rule's requirement that such notification be made every 60 days.
“It was very important,” said Mr. Goldbrum. “We were concerned that it (the 60-day requirement) would have resulted in a constant stream of disclosures even with minor changes.”
But the final regulations also contain some strict requirements. For example, a plan sponsor is required to terminate its relationship with a service provider if it doesn't receive the required disclosure material. If the sponsor believes it hasn't received the necessary information, it must request the information in writing; and the provider must comply within 90 days.
“The DOL wants sponsors to deal expeditiously and seriously with providers who are not giving information that is required,” said Mr. Goldbrum of the SPARK Institute.
Sponsors “have to pull back the curtain,” said Mr. Stone. “You have to go to the provider and say. ‘We need clarification or more information'. You can't just stuff it in a drawer and forget about it.”