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Zen and the Art of Fee Disclosure: What 401k Plan Sponsors Can Expect from 408(b)(2) Service Provider Disclosures

June 26
00:53 2012

July 1, 2012 – a date of clarity or a date of confusion? The alert 401k plan sponsor and fiduciary will recognize this day as the effective date of the section 408(b)(2) – the DOL’s Fee Disclosure Rule. Less certain, though, is whether the new disclosure rule actually helps or merely addles 401k plan sponsors and their plan’s participants. To help 401k plan sponsors better anticipate what’s coming, FiduciaryNews.com interviews several firms who fall under the definition of a 408(b)(2) “service provider” and asked them what they intend to do regarding disclosure. Unfortunately, these disclosures appear to promise only a mixed bag, leaving some 401k plans sponsors befuddled.

First let’s focus on what the at least one industry group calls the “best practices” for 408(b)(2) fee disclosure. For this, we turned to The Centre for Fiduciary Excellence (CEFEX). CEFEX is an independent global assessment and certification organization that focuses on the financial services industry (fiduciaries and fiduciary support organizations) to ensure best-practice fiduciary processes are in place. According to its web-site, “by working closely with investment fiduciaries to assess and improve risk management for institutional and retail investors, CEFEX’s helps determine the trustworthiness of investment fiduciaries.” The organization provides an independent recognition of a firm’s conformity to a defined Standard of Practice.

In terms of 408(b)(2) fee disclosure, “the plan sponsor should expect a clear disclosure on all of the compensation received by the Advisor or its affiliate, for the services provided to the plan. This should include direct and indirect compensation,” says Carlos Panksep, managing director of CEFEX. Panksep adds, “The clearest way to provide the disclosures is in a Service Agreement which is signed by both parties. The Service Agreement should describe all of the services provided by the Advisor, its compensation, and its fiduciary status. If there is indirect compensation, the agreement should identify the payer and describe the arrangement for compensation. The plan sponsor should expect an explanation of compensation which is determined on a transaction basis or charged directly against the plan’s investments and reflected in the investment’s net value. Astute Advisers should also disclose any potential conflicts of interest which may be related to the plan’s investments.”

Famed ERISA attorney Fred Reish has already spoken about his primary concern with the DOL’s new Rule (see “New 408(b)(2) “Guide”: Not Necessarily What 401k Plan Sponsors Hoped,” FiduciaryNews.com May 8, 2012) . His biggest fear is 401k plan sponsors will be the recipients of a core dump of information containing so much – relevant and irrelevant – data it will be nearly impossible for them to understand. Already, as the same article indicates, we have seen some fee disclosure examples, particularly from bundled service providers, exceeding a dozen pages. This information overload strategy may leave room for service providers who provide simpler, easy-to-understand formats some ammunition as they market against providers offering reams of unreadable text and tables.

Clear Financial Strategies, Ltd. in Crystal Lake, Illinois, is one of those firms seeking just such an advantage. “Our fee schedule is built into our contract and then each quarterly investment committee meeting report we include a section that enumerates our and every other providers fee in percentage and dollars to the plan,” says Allen Bronton, Global Wealth Manager at the firm. Bronton says his firm has been providing “full disclosure since we opened our doors” in 2006. The firm can offer fairly simple disclosure because, according to Bronton, “We do not have any proprietary funds nor do we accept any direct or indirect compensation from any provider for one of our client plans.”

Andrew M. Gracan, Vice-President/Retirement Plan Advisor at First Commonwealth Financial Corporation in Pittsburgh, Pennsylvania, says his firm currently doesn’t accept revenue sharing or 12b-1 fees and has been reporting fee disclosure for the last six month. He outlines his firm’s disclosure methods in this way: “The information we plan on providing the sponsor are: a) A brief explanation of the reason for the correspondence (408(b)(2) and a link to the dol.gov website.); b) The 4 essential elements the DOL requires that the disclosure contain; and, c) We ask them to sign the document to acknowledge receipt of the disclosure and the attachments.” Gracan defines the “4 essential elements as: “1) Who the service provider is; 2) A description of the services we provide to the plan and an attachment of our service agreement; 3) A declaration of our fiduciary status (we are a co-fiduciary for all of our plans whether 3(21) or 3(38)); and, 4) The fees that we charge to the client/plan (tiered fee schedule or flat dollar amount) and whether those fees are paid by the plan or the client.”

Presidium Retirement Advisers, Inc. of Gastonia, North Carolina is another firm which “does not offer any affiliated funds or any funds that pay a platform fee to us,” according to its president, Anne Comer. She also says, “On an annual basis, we prepare a fee study and benchmark our plans. We review this with the plan committee and look for any areas that we can improve.” Although the firm accepts no revenue sharing, Comer admits it does occasionally recommend funds that offer revenue sharing. In such cases, she says, “it is returned to the participants’ accounts from which the revenue was generated. If that is not possible, it is credited to an ERISA spending account and used to offset plan expenses.”

But, what happens in the case where the 401k plan sponsors wishes to allow service providers to compensate their fees through revenue sharing? Courtenay Shipley, President of Shipley Capital Advisory with offices in Nashville and Washington, DC, says her firm has been disclosing fees through its service agreements for two years and will make a special iteration again this summer. She says, “Some of my fees may be collected indirectly to offset what the plan sponsor would pay directly and that is outlined in their service contract in the fee section.”

So it would seem there’s a ready template for independent investment advisers not part of a bundled program. The same could be said for independent recordkeepers, too. Richard Burke, Principal at Burke Group in Rochester, New York says of his firm’s own fees, “We have provided a separate two-page exhibit customized for each client, and they’ve been instructed to attach the exhibit to our service agreement. The exhibit outlines specific direct and indirect compensation received and contains the required language for services.” Being an independent recordkeeper means Burke Group is in a unique position to summarize all service provider information and report it to plan participants (this part of the Fee Disclosure Rules kicks in the end of August). For this, Burke says his firm has created a short (perhaps three page) annual disclosure statement that outlines all the plan’s fees by service provider.

Based on these reports, and the earlier article run in FiduciaryNews.com, it appears 408(b)(2) may become a tale of two cities. In one city, all 401k plan sponsors use independent service providers. That city will have short, obvious fee disclosure reports that should be easy to understand for plan sponsors and plan participants alike. The other city contains those 401k plans using service providers seeking to obscure fees. These may or may not be bundled services providers, but the examples we’ve seen so far all come from bundled service providers. Plan sponsors in this city can expect more than a dozen pages of disclosure but not necessarily a guide or key to explain all the data, including which data pertains to their specific plan.

This leads to a frank question: Will those 401k plan sponsors confused by what they see in 408(b)(2) fee disclosures seek greater understanding, or will they expose themselves to greater fiduciary liability and ignore the plight of their plans’ beneficiaries?

Interested in learning more about this and other important topics confronting 401k fiduciaries? Explore Mr. Carosa’s new book 401(k) Fiduciary Solutions and discover how to solve those hidden traps that often pop up in 401k plans.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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