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Laying It on the Line —
How New Disclosure Rules Will Affect Financial Advisors
THE DEPARTMENT OF LABOR (DOL) has issued
far-reaching, proposed disclosure regulations under
ERISA Section 408(b)(2) that will affect virtually all
retirement plan service providers — including broker
dealers and financial advisors.
Although the DOL has not circulated an effective date,
it is anticipated that the new rules will take effect in
2009. The rules will mandate additional disclosures to
plan fiduciaries concerning service provider fees and
relationships between providers. This article will
review the general requirements of the regulations and
explore several of the more potentially problematic
elements of the regulations.
Who Is a Service Provider?
The
DOL’s goal in issuing the regulations is to help plan
sponsors better understand the compensation structures
and business relationships of their service providers,
including any potential conflicts of interest between
the various providers. Service provider is broadly
defined in the regulations. The virtually all-inclusive
definition includes parties who receive or may receive
compensation, either directly or indirectly, when
providing one or more of the following services:
It
appears that service providers will now be required to
automatically provide plan officials with the
information that plan officials, acting in their role as
a fiduciary, should have been asking for all along. The
struggle for service providers will be in compiling the
required information for the many business and service
models in which they operate.
What Are the New Requirements?
The
regulations require service providers to disclose
information on:
In
addition, service providers are generally required to
have a written contract with the plan or plan sponsor,
and clearly state whether there are plan fiduciaries
based on the services provided.
According to the preamble to the regulations, a service
provider must disclose any “material financial, referral
or other relationship” with third parties, and further
states that
If the relationship between the service provider and this
third party is one that a reasonable plan fiduciary would consider to be
significant in its evaluation of whether an actual or potential conflict of
interest exists, then the service provider must disclose the relationship.
Because of the broad scope of this statement, obviously,
there is much room for interpretation. Consequently, the
difficulty with compliance will be identifying and
disclosing the myriad of relationships and permutations
thereof that exist in a complex marketplace. Consider
also that the regulation’s preamble explains that
“Conflicts may arise when a service provider can affect
its own compensation in conjunction with its services.”
This may have huge disclosure implications for service
providers that offer investment platforms with funds or
subaccounts managed by the service provider or an
affiliate.
Most
401(k) investment platform providers offer proprietary
and nonproprietary funds within a platform. Typically,
proprietary funds are more profitable than
nonproprietary funds. If the platform provider engages
in practices that may have the effect of directing
additional dollars to proprietary funds, would these
practices have to be disclosed? Take, for example, this
hypothetical situation. Assume ABC platform provider
offers multiple target date funds within the platform.
The target date funds are composed predominately of
proprietary funds. ABC’s employee communication
materials, call center scripts, and Web-tools are
designed to encourage participants to consider target
date funds. Would such practices need disclosure and
would the fee differential between proprietary and
nonproprietary funds need to be disclosed? As the
proposed regulations currently stand, a conservative
interpretation would seem to suggest disclosure.
Conclusion
The
proposed regulations will require extensive analysis of
roles and practices. The disclosure requirements are
dynamic and will require further clarification and
interpretation. Financial advisors can begin to prepare
by:
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Discussing the new rules with their broker dealers
and clearly defining roles and responsibilities
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Reviewing business practices and relationships to
identify potential conflicts of interest that would
require disclosure
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Detailing fees — both direct and indirect
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Identifying all affected current and potential
clients
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Managing client expectations
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Staying current with new developments
Contact Columbia Management Today
Your
clients may retire, but their money shouldn’t stop
working for them. The Columbia Management Learning
Center is a dedicated resource focused on education,
research and the promotion of practical investment
strategies. From regulatory and legislative issues to
demographic and economic trends, we strive to be an
integral partner to individuals and advisors in the
quest for retirement success. We are committed to
providing the latest information and the most innovative
solutions. To discuss how you can take advantage of this
dedicated program, contact your Columbia Management
Regional Sales Consultant.
401(k) Distribution
877.894.3592
Columbia Management Group, LLC (“Columbia Management”)
is the investment management division of Bank of America
Corporation. Columbia Management entities furnish
investment management services and products for
institutional and individual investors.
This
material is for educational purposes only. It cannot be
used for the purposes of avoiding penalties and taxes.
Columbia Management does not provide legal or tax
advice. Clients should consult a legal or tax advisor
for individual needs.
The
Columbia Management Resource Desk is staffed by the
Retirement Learning Center, a third-party industry
consultant that is not affiliated with Columbia
Management or any other Bank of America affiliate. Any
information provided is for informational purposes only.
Please consult a tax advisor or attorney for specific
tax or legal needs.
© 2008
Columbia Management Distributors, Inc. One Financial
Center, Boston, MA 02111-2621 800.426.3750
www.columbiamanagement.com
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