On March 11, 2014, the U.S. Department of Labor (the “DOL”) issued its long-anticipated proposal concerning a separate roadmap or guide (the “Guide”) that would need to be included with a covered service provider’s initial fee disclosures (the “Fee Disclosure”) required by the final regulations (the “Final Regulation”) under Section 408(b)(2) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The proposal (“Proposal”), which is in the form of an amendment to the Final Regulation, would require a covered service provider to provide a Guide to the responsible plan fiduciary (the “Plan Fiduciary”) in certain circumstances in order to ensure that the Fee Disclosure is “evident and easy to find among other information that is provided.” The purpose of the Guide would be to help the Plan Fiduciary identify and find the relevant information contained in a Fee Disclosure that cross-references other documents or exceeds a maximum page length.
The Proposal was foreshadowed in the preamble to the Final Regulation, which indicated that the DOL would be proposing additional guidance that would require covered service providers to furnish a summary or guide to aid Plan Fiduciaries as they reviewed the Fee Disclosures. The DOL attached to the Final Regulation a sample guide for voluntary use only and reserved a place in the Final Regulation for such requirement in the future. The wait is now over. Under its Proposal, the DOL has now decided to require covered service providers to furnish a Guide, rather than a summary, to Plan Fiduciaries under certain circumstances. The following highlights the key provisions of the Proposal, and our initial observations concerning its impact on the covered service provider community.
Overview of Proposed Amendment. The Proposal would add a new requirement, mandating that covered service providers furnish a Guide along with the Fee Disclosure if such disclosures are “contained in multiple or lengthy documents.” The covered service provider is the responsible party for providing the Guide, as it is adjudged by the DOL as being the best person to identify the location of what is often highly technical information found in multiple documents or in lengthy disclosures.
Specifically, the Proposal states that the Guide must be provided if the Fee Disclosure (i) is not contained in a single document, or (ii) is contained in a single document that exceeds a specified number of pages. In other words, the Guide would not be required if the Fee Disclosure were contained within a concise single document. The DOL has reserved for comment the number of pages that would trigger the Guide requirement for a single-document Fee Disclosure.
The Guide. The Proposal contains specific requirements for the format and style of the Guide. For each required disclosure item in the Fee Disclosure, the Guide must provide both a document and page reference, or some other sufficiently specific locator, such as a section number for a document or an electronic hyperlink that allows the Plan Fiduciary to easily find the Fee Disclosure item. The DOL has requested comments as to the relative merits of a page reference versus a section reference.
The Proposal does not change the required elements of the Fee Disclosure. The Guide must disclose the location of the following eight categories:
- The description of services provided to the covered plan;
- The statement concerning services to be provided as a fiduciary under ERISA and/or as a registered investment adviser;
- The description of all direct compensation;
- The description of all indirect compensation;
- The description of compensation that will be paid among related parties;
- The description of any compensation for termination of the contract or arrangement;
- The description of all compensation (and/or a reasonable estimate of the cost to the covered plan) for recordkeeping services;
- For ERISA fiduciaries to investment products or recordkeeping platforms that make investment alternatives available, the description of compensation, annual operating expenses and ongoing expenses (or, if applicable, total annual operating expenses) for each applicable investment product or investment alternative.
The Guide must also identify a person or office, including contact information that the Plan Fiduciary may contact regarding the Fee Disclosures. The Guide must be furnished as a separate document.
Electronic Disclosure. The Final Regulation allows a covered service provider to furnish Fee Disclosures electronically, including disclosures provided through a website as long as the Fee Disclosure is readily accessible to the Plan Fiduciary and there has been a clear notification on how to access the Fee Disclosure.
The Proposal follows suit by allowing the Guide to be provided electronically, but the Guide must do more than merely provide hyperlinks to prospectuses or other documents. Either a more specific link taking the reader directly to the required information must be furnished, or a page or sufficiently specific locator must be furnished in addition to the electronic hyperlink.
Changes to the Guide. Any change to the information provided in the Guide must be disclosed at least annually to the Plan Fiduciary.
Effective Date. The Proposal will be effective 12 months after the publication of a final rule concerning the Guide. However, as noted below in Open Issues, the DOL is looking for comments and feedback in a number of areas, including the number of pages that would trigger the Guide requirement for a single-document Fee Disclosure. The DOL has also announced that it will be conducting focus group sessions with fiduciaries to small pension plans after the end of the 90-day comment period, which may potentially extend the date of publication.
Open Issues. Items for which DOL seeks input and comment include the following:
- The number of pages that would trigger the Guide requirement for a single-document Fee Disclosure;
- Related considerations for page format, font size, margin requirements that might allow for manipulation of the page length.
- Whether a document/page number or an alternative “sufficiently specific locator” such as a section number, would be the appropriate standard;
- Should multiple alternatives be allowed, or should the final rule establish a single standard?
- The cost of implementing a specific page number requirement and web-based approaches, and the cost of technological requirements generally;
- Whether the separate document requirement for the Guide is likely to ensure that the Plan Fiduciary understands both the purpose and existence of the Guide;
- Should the Guide contain specific language such as an introductory statement, or a statement as to its significance if furnished electronically?
- Whether the annual disclosure of changes to the Guide should be replaced by an annual disclosure of the entire Guide;
- Suggestions and data on any aspect of the Guide, including whether the Guide (or any suggested alternative) is feasible, cost-effective, and ultimately beneficial to the Plan Fiduciary; and
- The effective date of the new Guide requirement.
Anticipated Impact on Service Providers
Many broker-dealer firms and record keepers currently use Fee Disclosures that cross-reference multiple documents (e.g., references to prospectuses, disclosures prepared for purposes other than ERISA compliance, or web-site information). The Guide requirement may require a substantial re-engineering of the ERISA 408(b)(2) disclosure process for affected firms. Even though the effective date is presumably many months away, the time and expense necessary to reconfigure a firm’s disclosure process and to make the necessary technology changes may be significant, especially for larger firms with multiple offices and investment products. A decision will need to be made in the relatively near future as to whether Fee Disclosures as modified by the proposed Guide requirement should be handled through internal staffing and resources, or outsourced to a third party provider that is capable of preparing the required Fee Disclosures for a fee.
The Guide requirement is not expected to have as large an impact on investment adviser firms. Many registered investment advisers rely on their advisory agreement for purposes of complying with the Fee Disclosure rules. Certain investment advisers may reference the firm’s Form ADV Part 2 for 408(b)(2) fee disclosure purposes, but typically do not cross-reference any other documents. If the length of their advisory agreements or cross-references to their ADV disclosures were to trigger the Guide requirement, investment adviser firms generally should be able to create any required Guide in consultation with counsel.
Final Thoughts. The Guide is intended to supplement, rather than replace, a covered service provider’s Fee Disclosure. It is designed to serve as a “tool” to be used by the Plan Fiduciary, and the Guide should help Plan Fiduciaries navigate their respective covered service provider’s Fee Disclosures. At the same time, it will bring further attention to and place indirect pressure on the Plan Fiduciary to properly discharge its duty to evaluate the Fee Disclosure, assuming that the Guide achieves its intended purposes.
Notwithstanding the costs and other challenges faced by the different members of the covered service provider community, it is important to remember that the overarching objective of the Guide is to facilitate an informed and thoughtful review of Fee Disclosures, which ultimately inures to the benefit of the plan and its participants. Given that objective, we may see the Guide adopted by many covered service providers simply as a matter of industry best practices, even before the Proposal is finalized and actually implemented by the DOL.
As the discussion continues among the DOL and the retirement community, we will be providing additional thoughts and insights on this development.