By Randy Myers
Barring any last-minute postponement by the U.S. Department of Labor (DOL), retirement plans and their service providers will face a new set of compensation disclosure requirements beginning April 1, 2012.
The new requirements are spelled out under Section 408(b)(2) of the Employee Retirement Income Security Act, or ERISA. They specify that “covered service providers” must disclose compensation information to their defined-contribution-plan and defined-benefit-plan clients.
Covered service providers include any person or entity acting as an ERISA fiduciary or registered investment advisor, or providing recordkeeping or brokerage services to a participant-directed plan. They also include anyone that provides certain other services in expectation of receiving indirect compensation; these services include brokerage and consulting services, third-party administration, or investment advice. Providers of stable value wrap contracts are not covered service providers, attorney Donald Myers, a partner in the Employee Benefits and Executive Compensation group at Morgan, Lewis, Bockus LLP, told participants at the 2011 SVIA Fall Forum.
Myers said he didn’t expect DOL to impose any further delays in implementing the new rules, which originally had been slated to take effect in July 2011.
Accordingly, Myers recommended that plan fiduciaries begin determining which of their service providers are covered service providers and then confirm that those vendors are prepared to make the requisite disclosures on a timely basis. Fiduciaries also should start developing a process for requesting missing information from those service providers, and for notifying DOL if information is not received on a timely basis. Finally, he said, they should start developing a process for reviewing the information they receive to determine if a service provider’s compensation is reasonable.
In addition to the new 408(b)(2) reporting requirements, Myers noted that DOL also has released final regulations under ERISA Section 404(a) requiring participant-directed individual retirement plans, such as 401(k) plans, to make certain new disclosures to their participants and beneficiaries.
In addition to generating information about investments and administrative expenses, plans must provide performance and expense data for each of their investment options. Also, plan administrators must make sure a website is available where plan participants can review this information, along with a glossary of investment and financial terms or a link to such a glossary.
The SVIA recently surveyed 22 stable value managers to find out how they’re reporting fees now and how they are interpreting the new regulations with respect to stable value funds. In particular, the survey wanted to find out how they plan to account for stable value wrap fees. Eight of the surveyed managers were insurance companies.
The majority of the insurance companies said they currently report wrap fees in their expense ratios, while the majority of the other managers do not. About half the surveyed managers said they expect their reported expense ratios to change once the new regulations go into effect. A majority said they view wrap fees as an administrative fee for reporting purposes, rather than as a trading fee or “other” fee. “In our view,” observed Nick Gage, associate director at Galliard Capital Management and a speaker at the SVIA Fall Forum, “that would argue for including them in the overall expense ratio.”
Half the managers surveyed said clients were indifferent as to how wrap fees were reported. Clients wanted to know that their stable value managers were prepared to comply with the reporting requirements. Only five managers said clients had indicated they wanted the wrap fees to be included in the expense ratio.
Some large financial institutions, Myers noted, have taken the position that wrap fees aren’t part of the expense ratio and should be disclosed separately. “There really isn’t any specific guidance from DOL about how to do it; maybe the final regulations will deal with it,” he said. “Right now, I don’t think there’s necessarily a right or wrong way.”
Galliard’s anticipated approach, Gage said, will be to report wrap fees as a line item within fund operating expenses and in the headline expense ratio reported to participants. He suggested that would best meet the expectations of clients and their consultants and satisfy both the spirit and letter of the new DOL regulations.
In response to a question from the audience, Gage said that where a Galliard fund is on a third-party platform, it anticipates making its required disclosures to the plan recordkeeper rather than to the plan directly. “A lot of recordkeepers have been out in front on this, providing templates for us to use,” he noted.