One down, two to go: Trio of important DOL regs reshapes 401(k) advice business

Elizabeth’s note: While financial reform and the SEC’s new power to come up with a regulatory regime for brokers that’s based on the fiduciary standard continue to garner the most of attention, there’s an equally important change going on in the parallel universe of retirement plan advice. The Department of Labor has been steadily issuing a stream of proposed regulations embracing the twin ideas of more disclosure and fees that aren’t tied to invesment products. This topic continues to be of keen interest to readers. Last month, expert Phil Chiricotti told advisors who want to get into the business that it behooves them to pay close attention to the rules. See: Phil Chiricotti speaks out on broker-sold commissions, RIA fees and heresy.

The Department of Labor late last week released regulations that, for the first time, require all service providers to employee benefit plans to disclose the direct and indirect fees they earn from plans.

“Service providers” includes everyone from advisors to brokers to investment-product companies to third-party administrators. Employee benefit plans includes both defined benefit and defined contribution plans.

Tons of work

“This will be a lot of work in the entire industry,” said Brian Graff, CEO and executive director of the American Society of Pension Professionals and Actuaries, particularly for providers of insurance products and collective trusts. “These types of fees in non-mutual fund investments have never been disclosed.”

Advisors will be affected, of course: those that provide plan services will need to disclose their fees, even those that are earned indirectly through revenue-sharing arrangements with mutual funds, for instance. Advisors that help plans sort through investment options or third-party administrators may find their lives easier, because it will be simpler to compare fees under the new disclosure rules.

The regulation is the first in a trio of big regulatory moves expected from the Department of Labor over the next few months. The Department continues to work on the Investment Advisor rule, which requires that anyone advising a 401(k) or an IRA be compensated on a level-fee basis, meaning that meaning that their compensation does not vary based on the investments in the account, or that they use computer modeling to create the investment strategy they recommend. Why the DOL’s proposed 401(k) rules could ding brokers and leave the spoils to RIAs

Graff said that final rule is expected to be released in the next few months.

DOL to tackle what defines fiduciary

Also this fall, the Department has said that it intends to release a proposed regulation on the definition of fiduciary. At issue in that rule, said Graff, could be the extent to which anyone offering advice to a plan is defined as a fiduciary.

“If you say, here are the 20 investment options that are right for this plan, does that make you a fiduciary?” he said. “On the other hand, suppose you offer a plan a platform of 1,000 investment options. Are you then a fiduciary?”

Depending on how sweeping the rules are, the fiduciary definition could radically reshape the 401(k) business. A broker would be held to the ERISA fiduciary standard requiring him or her to put the clients’ best interest first.

More disclosure

The regulations reflect a growing preoccupation in Washington, D.C., over fees and disclosure of conflicts of interest on investment advice. After the financial reform bill passes, the SEC will be required to study the question of how much brokers must disclose about their fees to retail clients.

The DOL rule changes could also affect IRAs. See: IRA assets could be ripped from the grasp of brokers if DOL has its way

Legislation that would more closely prescribe fee disclosure on employee benefit plans has been approved by the House of Representatives and awaits action in the Senate, according to Aaron Albright, spokesman for the House Committee on Education and Labor.

That legislation, which has been shepherded by Rep. George Miller, D-Calif., is more specific than the DOL rules about how service providers disclose their fees, creating tiers of fees that may make it easier to compare different providers.

“Ours is more complex,” Albright says. “The Department’s regulation was a good first step.”

If the new law is not passed, the DOL’s rule will become effective July 16, 2011. Written comments on it must be received by Aug. 30th. Comments can be submitted at mailto:www.e-ORI@dol.gov.

The rule calls for disclosures to be made in writing, though it does not say that the disclosures must be made in a particular format or on a particular form.

The most controversial part of the new rule was the definition of “service provider.”

Fact sheet

Here’s what the Department’s accompanying fact sheet says on that point:

The proposed regulation generally included service providers falling into one of the following categories: (1) Fiduciary service providers, whether under ERISA or under the Investment Advisers Act of 1940; (2) service providers that will perform banking, consulting, custodial, insurance, investment advisory, investment management, recordkeeping, or third party administration services for the plan; or (3) service providers that will receive indirect compensation in connection with providing accounting, actuarial, appraisal, auditing, legal, or valuation services to the plan. The Department believed that these service arrangements, and their associated compensation structures, were the most likely to give rise to conflicts of interest.