Those Proposed Fee Disclosure Regs….

Written by: Bob Toth, Nick Curabba

What better topic to kick off a benefits blog than the issue of the day: fee disclosure? The recently proposed § 408(b)(2) regulations are sure to generate voluminous and voluble comments from the regulated community.   As we have previously noted, the potential impact of these fee disclosure regulations is so far reaching, in fact, that we have started an office pool on whether the number of public comments received by the DOL on these proposed rules will surpass the jaw-dropping 122 comments instigated by the qualified defaults investment alternative regulations.

The problem is, however, how does one argue against something as wholesome as disclosure?  After all, many of us who fought in the legislative battles to enact statutory protections for fiduciary investment advisors, not disingenuously extolled the virtues of more and better disclosure of relationships between advisors and investment products, and of fees. Indeed, a look at the Congressional testimony last year during hearings on fee disclosure shows that service providers and sponsors joined together in supporting enhanced disclosure requirements. So, how can anyone take a stand against disclosure? 

One can, however, think about the real-world ramifications of the kind of disclosure the DOL's proposal would require.  Though the financial services industry has sometimes been accused of crying "wolf" about the administrative burden posed by new rules, this newly proposed set seems to be of a genre to themselves.  They are likely to cause organizational challenges within many service companies. Take, for example, a large, complex financial institution which consolidates under one umbrella a retail mutual fund underwriting, a registered investment advisor, a broker-dealer, an insurance company, and a recordkeeper/third party administrator division.  In the real world, these separate divisions act largely as independent players in the marketplace, with communication between them being ad hoc at best.

Now, these disparate pieces of the organization will need to communicate some very specific information between them, in order to fulfill disclosure obligations to the plan sponsors.  This may eventually create a number of unusual business opportunities (a likely topic of another blog posting). However, this will undoubtedly first cause a great deal of organizational pain as companies will have to spend a lot of time and money to get their internal communications up to speed in order to be able to provide the kind of disclosure the proposed regulations contemplate.  With the DOL moving at a pretty good clip toward finalization, there will simply not be enough time to get everything that is needed in place.

Talk about a trap for the unwary.  Without quickly developing and implementing some sophisticated internal checks, large financial institutions may find themselves vulnerable to prohibited transactions penalties. Making matters worse, this is not just a case of waiting out an enforcement action by the Department.  Under the proposed class exemption accompanying the proposed 408(b)(2) rules, plan sponsors will be forced to play stool pigeon, and inform the Department if and when proper disclosures are not made. In a word: Yikes!

While we have no visions of grandeur that the Department will call it quits and drop their whole fee-disclosure initiative, comments setting the real-world context of the proposal's effects may help make the rules more workable, and ultimately more effective.

Welcome to our new blog!  The Benefits and Executive Compensation Group at Baker & Daniels is pleased to start this new forum for topical employee benefits issues. In addition to discussions of how benefit law developments affect plan sponsors and participants, we  will often chime in on how retirement plan vendors may also be impacted by the issue of the day. We are also hopeful to have the occasional guest commentator, and perhaps even an interview or two.

Your comments are welcome and invited!  We will post comments that seem to further whatever discussion is at hand (which can be anonymous at your request).

We look forward at having a bit of fun at this venture. Hope to be hearing from you.