Report of a possible delay in DOL's fee disclosure rule sparks apprehension among advisors and industry observers

Brooke’s Note: The RIA business doesn’t get many tailwinds that it doesn’t produce through its own accountable-to-client actions. But an RIA-favoring sirocco has been brewing for the past couple of years in the form of a rule that would blow the fog out of 401k disclosure. That even teensy-tiny signs of foot-dragging on this big regulatory change are in the air is of concern to those who know the gravity of what’s at stake. This article spells out some of those concerns and those with more pragmatic views. See: Why the DOL’s massive new 401(k) disclosure requirements are a 'very, very big deal’.

Industry leaders and advisors are nervous that the Labor Department may be pushing back the compliance deadline for a crucial rule that is currently slated to go into effect April 1.

A Reuters article yesterday quoted anonymous sources stating that the DOL may push back the deadline.

Under a regulation from the DOL — 408(b)(2) — advisors are required to present clients with a written agreement of services, fees, compensation and any conflicts of interest. The issue of whether or not the advisor is serving as a fiduciary will also be addressed in these disclosures.

These rules have been controversial from the start because they may make life difficult for legacy players in the retirement market.

In October, the head of a large RIA and execs of retirement plans for UBS and LPL squared off in a spirited debate about whether advisors should take on fiduciary responsibility for the 401(k) plans they oversee. See: The head of a $12 billion RIA spars with UBS and LPL execs on the great fiduciary debate.

The Labor Department did not immediately respond to an e-mail request for comment.

Landmark rule

BrightScope, Inc. co-founder Mike Alfred says his company, which ranks 401(k) plans, is closely monitoring this issue.

Alfred says his company is working closely with Labor Department officials on a number of projects but hasn’t discussed disclosure recently.

“This is a rule that nobody will forget about because it’s so important. It very well might be the most important change in the 401(k) marketplace in its history,” Alfred says. See: Why the DOL’s massive new 401(k) disclosure requirements are a 'very, very big deal’.

David Tittsworth: An overly aggressive deadline
... may punish well-intentioned firms.

'Over my dead body’

In fact, Alfred says he heard recently that Assistant Secretary of Labor Phyllis Borzi said there would be further delays, 'over my dead body.” See: A Q&A with Phyllis Borzi, the DOL powerbroker aiming to remake the retirement market.

But others fear that the rule could get pushed aside because many companies oppose such change. Oklahoma City advisor Terrence Morgan, who runs a 401(k) business, says he’s fearful that opposition could slow the enactment of the rule.

Morgan works with many small businesses in Oklahoma managing 401(k) plans that have generally less than $10 million in assets.

“It’s a tragedy that this may be delayed. This is a tragedy for the marketplace and every participant in America that it can’t happen sooner. I think there’s a lot of back-room pressure.”

Prep time needed

Randy Long: [Small] service providers aren’t
ready to deal with this.

Uncertainty about when the rule will be released and about its contents has put advisors who need time to comply with the final rule in a difficult position, says David Tittsworth, executive director of the Investment Adviser Association.

Labor officials originally crafted the current version of the rule in July 2010 (See: Why the DOL’s proposed 401(k) rules could ding brokers and leave the spoils to RIAs) giving providers 10 months to comply. Industry leaders opposed the short deadline and the Labor Department extended the deadline to April 1, 2012.

But since industry leaders are still waiting for the final version of the rule, that extension has done little good.

“Until we actually see the final rule, it’s impossible to assess how much time will be needed,” Tittsworth says. “I hope the Department of Labor will be mindful of real-world concerns relating to implementation of the final rule. It seems logical to have some flexibility to ensure that firms get it right — and to promote long-term compliance — rather than creating an overly aggressive deadline that may punish well-intentioned firms.”

'Not even close’

Craig Watanabe is ready now.

The industry simply isn’t ready to implement the changes yet, says Phil Chiricotti, president of the Center for Due Diligence, an organization that hosts conferences about 401(k) plans.

“The industry is not even close to being ready to comply,” he says. “They simply can’t do it.”

Randy Long, founder and managing principal for SageView Advisory Group LLC, an RIA with more than $12 billion in assets, says while his firm is ready for these changes, he believes others simply aren’t.

“I don’t think they’ll be forgotten, but I think more time is necessary from an administrative standpoint for some in the industry. In the small end, the service providers aren’t ready to deal with this.”

On the ball

Craig Watanabe, an advisor with Penniall & Associates, Inc., an RIA with approximately $600 million in 401k assets under management and $400 million in non-retirement assets, says his firm has been ready to comply with 408(b)2 for more than a year.

Watanabe thinks making the changes will be easiest for RIAs, since they already have full disclosure and written service agreements for 401(k) clients.

David Loeper: Delaying that is harmful,
not helpful.

“Fee disclosure is a good for the industry,” he says. “While the implementation may be delayed it is only a matter of time. Firms would be well advised to be proactive and become compliant as soon as possible,” Watanabe says.

Advisors should get a jump on disclosure documents, says David Loeper, president of Wealthcare Capital Management IP LLC, the firm that sued UBS. “The biggest help advisors could give to their businesses is full, complete and transparent disclosure,” he says. “Delaying that is harmful, not helpful.”

Surprises on the horizon

Even though the industry has done a great job in improving fee disclosure, Bart Bonga, vice president with Rothschild Investment Corp. in Chicago, says he believes some employers may be stunned to see what the actual costs are for their firm’s 401(k) plan.

Bonga’s firm manages more than 60 401(k) plans totaling more than $500 million.

“Since the industry knew these regulations were coming, you have seen lower margins but that doesn’t mean there won’t be some high-fee horror stories, I know there will be,” he says.

Since this article ran, the DOL has stated through other channels that it still hopes to hit the Jan. 31 deadline. For one source, click here