The final rule is designed to help clients understand the fees that are being charged so they determine whether they are reasonable. It’s your job to meet these new disclosure requirements while helping your clients understand why these fees are reasonable given all the services performed. The final rule, which was published on February 2nd, includes a new effective date of July 1, 2012, to ensure that covered service providers and other parties have sufficient time to prepare for compliance with the rule.This rule applies to those covered service providers that expect to receive $1,000 or more in compensation and provide certain fiduciary or registered investment advisory services, make available plan investment options in connection with brokerage or record-keeping services or otherwise receive indirect compensation for providing certain services to a plan. Although affiliates or subcontractors of the covered service providers may provide some or all of the services under the contract or arrangement or may receive some or all of the compensation for the services, the affiliates or subcontractors do not, themselves, become “covered service providers” solely as a result of the services they perform. In an arrangement where multiple services are provided to a plan, only the party entering into the agreement with the Plan is responsible for making the 408(b)(2) disclosures. The DOL did not provide a specific format for the required disclosures, but stated that they must be written. The required disclosures include:
- Description of the services to be provided
- The compensation paid
- The method of payment
Disclosure Requirements
Services – A description of the services to be provided pursuant to the contract or agreement. Status – If applicable, a statement that the provider, an affiliate, or a subcontractor will provide, or reasonably expects to provide, services as an Investment Adviser registered under the Advisers Act or any State law acting as a fiduciary of the plan.Compensation – All compensation that will be received by the covered service provider, its affiliates, or subcontractors including:
- Direct compensation – A description of all direct compensation received by the provider, affiliate, or sub-contractor in connection with the services, usually payment received directly from the Plan assets. Direct compensation, however, does not include payments from the Plan Sponsor that are not from plan assets.Direct compensation” includes (i) compensation initially paid by the Plan Sponsor, but which is then subsequently reimbursed from the plan, and (ii) compensation paid directly from participants’ and beneficiaries’ accounts.
- Indirect compensation – A description of all indirect compensation received by the provider, an affiliate, or a subcontractor in connection with the services. The disclosure for indirect compensation must include (i) the services for which the indirect compensation will be paid; (ii) the payers of the indirect compensation; and (iii) a description of the agreement between the payer and the covered service provider, an affiliate, or a subcontractor, as applicable, regarding such indirect compensation.
- Related Party – Any compensation that will be paid among the covered service provider, an affiliate, or a subcontractor, that it is set on a transaction basis (e.g., commissions, soft dollars, finder’s fees or other similar incentive compensation based on business placed or retained) or is charged directly against the covered plan’s investment and is reflected in the net value of the investment. The disclosure must include (i) identification of the services for which such compensation will be paid; and (ii) identification of the payers and recipients of such compensation (including the status of a payer or recipient as an affiliate or a subcontractor).
Manner of Receipt – Describe how compensation will be received (i.e., billed to plan, deducted from plan accounts, etc.) and, if applicable, must disclose the manner in which direct compensation is determined (e.g., as an amount, formula, per capita charge or percentage of plan assets.In the future, covered service providers may be required to furnish Plan Fiduciaries with a summary or guide, separate from the initial disclosures, identifying certain information such as the document, section and page number where descriptions of services and compensation may be found. The Final Regulations contain an appendix as a sample guide. Presently, the use of the sample guide is strictly voluntary. However, the DOL has indicated that it will issue proposed regulations on this issue in the near future, and the sample guide, or something similar, may be required in the future.The Final Regulations also requires that upon receipt of a written request from a Plan Fiduciary, the covered service provider must provide the information reasonably in advance of the deadline for reporting and disclosure requirements, unless the disclosure is impossible due to extraordinary circumstances beyond the CSP’s control (in which case the information must be disclosed as soon as reasonably possible).A covered service provider must disclose any changes to this disclosure information, corrections to the information provided or omitted information as soon as possible, but no later than 60 days after discovering the change, error or omission.
About Red Oak Compliance Solutions
Red Oak Compliance Solutions is a leading provider of intelligent compliance software, offering a range of AI-powered solutions designed to help firms of all sizes successfully navigate the increasingly complex regulatory landscape. Our suite of 17(a)-4/WORM compliant features offer risk minimization, cost reduction, and process optimization capabilities with features that are designed to evolve with our client’s needs. Our flagship advertising review software enables firms to deliver compliant content to the market with confidence, faster. Our Disclosure Management and Intelligence solution simplifies the management of disclosures, while our Registration Management solution automates and streamlines the licensing and registration process, further enhancing your internal processes.