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408b2 Disclosures


austin3515
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Austin - as an example, let's say the investments are on a Hancock platform, but you do normal third-party TPA work with quarterly valuations, etc.

There are varying interpretations out there. One is that under the regulations you are a platform recordkeeper. Another is that you aren't. These types of questions, while very clear-cut to some people, are not so clear-cut to others.

What I'm going to find particulalrly annoying is when, if my expectations are correct, the DOL decides that the disclosures themselves aren't enough, but that a "roadmap" has to be included. I wish some of these nitwits had to come do our job for a while...but I need to avoid getting into my ranting mode, or I'll be bummed out for the rest of the day. I wonder if the DOL would be less demanding if we told them they are "harshing our mellow?"

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Well, as a TPA, you work with whatever investment platform the client wants, or maybe more accurately, whatever platform the broker works with, right? So some clients choose Hancock, some TD Ameritrade, some Transamerica, some Hartford, whatever...but it isn't "your" platform on your website - it isn't offered "in connection with" your contract or arrangement. Depending upon what interpretation you prefer.

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The interpretation (a) that you are a platform recordkeeper with regard to the disclosure requirements, or (b) that you are not a platform recordkeeper. Not everyone agrees on this.

Changing the subject a bit, has there been anything definitive from the IRS about the actual penalty under 4975 if a 408(b) disclosure is late? Say your fees are $2,000, and you don't send the disclosure until July 2. Is the "amount involved" the full $2,000, hence an excise tax of $300? That seems the most likely interpretation to me, and the one that I'd take in the absence of something concrete to the contrary.

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(a) that you are a platform recordkeeper with regard to the disclosure requirements,

IF I'm the TPA and JH is the recordkeeper, what is the argument to suggest that I am platform recordkeeper?

Everything I've read says the penalty tax is based on the total fees collected for which you didn't meet the requirement.

Austin Powers, CPA, QPA, ERPA

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Austin - there are some folks who maintain that such an arrangement means that one or more DIA's are "...made available ( e.g., through a platform or similar mechanism) in connection with such recordkeeping services or brokerage services."

I'm merely saying that there is not universal agreement on this subject, that's all.

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I called the DOl to find out the answer to some questions. I wanted to know if the $1,000, was per calendar year, fiscal year, or the lifetime of the plan. The DOL rep said that they just had a training on that issue. The DOL stated to me that it was not made clear to them whether it was yearly or for the lifetime of the plan. However she stated that her best guess was that the $1,000 was per plan year.

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That;s contrary to everything I have ready. I had heard it was "over the life iof the contract." If the contract renews each year, than it's one year. If it's an evergreen, it's the life of the contract.

Believe me, it SHOULD be an annual limit, but there is nothing to support that interpretation in the regs.

Austin Powers, CPA, QPA, ERPA

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I've read through the previous posts on this thread and wanted to see if I am understanding our situation correctly......any guidance is appreciated!

We are a CPA firm that provides TPA services for a few plans. For the majority of our plans, the Plan Sponsor pays all plan related fees so we do not get paid from plan assets. We do have a few plans (with American Funds, Hartford, etc.) that we receive revenue sharing payments for which I understand makes us a Category 3 CSP for those plans. It is my understanding that:

1. For the plans we provide TPA services for where the Plan Sponsor pays our fees directly with no fees being paid from plan assets, we have no required 408b2 disclosures to make.

2. For the plans we receive revenue sharing payments on, we will only be required to disclose the revenue sharing payment information since all other fees are paid directly by the Plan Sponsor.

Am I understanding things the same as you?

Thanks!!

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1. For the plans we provide TPA services for where the Plan Sponsor pays our fees directly with no fees being paid from plan assets, we have no required 408b2 disclosures to make.

Correct, though even if they paid from plan assets you still are not receiving indirect comp, and therefore are not a covered service provider and therefore have no disclosures to make.

2. For the plans we receive revenue sharing payments on, we will only be required to disclose the revenue sharing payment information since all other fees are paid directly by the Plan Sponsor.

I think this is a bad idea, because if your client ever comes back to you and says I want to pay a bill from the forfeituire account, that becomes a prohibited transaction. Also, you should be disclosing any distribution fees paid by the Plan, otherwise, you have a PT.

Austin Powers, CPA, QPA, ERPA

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Gold - at some point, one would expect even the DOL to be a little bit reasonable about some of this when it actually comes to enforcement, particularly with regard to this initial year of disclosure. In the preamble, footnote 13, they give an example which may give an indication of their real type of concern - they use trailing commissions as an example, where even after the contract ends, commissions will be paid.

For a plan where you receive $50.00 per year for loan fees if participants take a loan, and only one participant currently has a loan, and all other charges are paid by the plan sponsor, it does seem to be stretching the point to assume that you will receive this for the next 20 years. I think you could "reasonably" expect not to receive $1,000 in such a situation.

I must say I won't be sorry to get through the first "cycle" on this and the participant disclosures. Should be a lot easier in year 2!

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Austin -

Thanks for your response! On your reply to my #2, our firm does not charge any distribution fees to the Plan. The only distribution fees that would be charged to the plan would be charged by American Funds, Hartford, etc. so wouldn't they be the one to include that in their disclosure?

If the client later wanted to pay their bill using the forfeiture account would it still be a PT if we provided a 408b2 disclosure prior to the bill being paid from the forfeiture account?

I agree that providing the most disclosure is the safest route but at this point I'm just trying to understand exactly what is "required" since I'm only 2 weeks away from showtime.

Thanks again!

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If the client later wanted to pay their bill using the forfeiture account would it still be a PT if we provided a 408b2 disclosure prior to the bill being paid from the forfeiture account?

My understanding is yes, because the initial disclosures for existing clients are due 7/1. You only get a second chance if ther eis a change in the contract.

At any rate, this is a gray area at best.

Austin Powers, CPA, QPA, ERPA

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We occasionally receive revenue sharing payments on a few of our clients. We were planning on just crediting their accounts for those amounts against their administrative fees. Would that eliminate the need to meet the disclosure requirements (we would disclose that any payments received from the investment company would be a credit to their account in our contract)?

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No. You're not meeting any of the exceptions. You need to disclose the nature of the arrangement at a minimum (i.e., 5bps yada yada yada), assuming ALL other direct expenses are paid directly by the empoloyer. If you think there might ever come a day when participant distribution fees or any other fees might be paid from forfeitures, then you should disclose everything you charge.

I struggle when people say "all my fees are always paid by the employer" because, what do you when they are not doing employer contributions, and there are forfeitures? Forcing them to reallocate the forfeitures? I just don't see how the option to pay fees with forfeitures can be universally be taken off the table for all of your clients.

Austin Powers, CPA, QPA, ERPA

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Assuming that clients are going to read a lengthy explanation about all of this, how do you disclose in detail that forfeitures may be used from time to time over the life of the contract (evergreen) to offset the TPA fees? It seems like that is the decision of the client. If they are the ones deciding, should it be a TPA disclosure?

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We did indicate in our "Manner of receipt" section the fees can be paid by the employer, from plan assets (and allocated to participant accounts) or from forfeitures. Then all the bases are covered. But regardless, the most important thing is to disclose the fees. If you don't disclose the fees, and then you pay from forfeitures, now there is a PT.

Austin Powers, CPA, QPA, ERPA

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@ MoJo. Yes, I agree that there are a number of people who get paid big bucks for very little. This is a problem that should be reviewed. Making service vendors fully disclose fees to plan sponsors has merit. I'm not sold on how 404(b) wants this done, but...

Actually, my point was more directed at the participant disclosures. (Something that does not directly impact my business.) I believe that these notices will be a total waste of money because few, if any, participant will read them. Fewer still will understand. Despite the dubious value, they must be generated. This will cost the vendor (typically the place where assets are held) money. These notices will not be generated at no cost. Where will that cost go? To raise underlying fees? To reduce rates of return? It will paid somewhere, and like most things, payment will not simply be a reduction of profit. It will be passed on if not in entirety, then in majority. So then the impacted programs look less attractive. Less attractive means fewer firms will have. Fewer plan adoptions will ultimately kill the existence of these plans. Is that good? I suppose in the age of the "nanny state" the concept of private retirement plans is an anathema? I think that this question needs to be asked as we watch Europe ignite into riots over a failure of government benefit plans to meet obligations. Should we strangle private pensions, making all retirees dependent on the government?

Perhaps I over reach in my conclusions. Perhaps as a national debt passes 17 trillion. Perhaps... ;)

Having braved the blizzard, I take a moment to contemplate the meaning of life. Should I really be riding in such cold? Why are my goggles covered with a thin layer of ice? Will this effect coverage testing?

ERPA, QPA, QKA

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@ MoJo. Yes, I agree that there are a number of people who get paid big bucks for very little. This is a problem that should be reviewed. Making service vendors fully disclose fees to plan sponsors has merit. I'm not sold on how 404(b) wants this done, but...

Actually, my point was more directed at the participant disclosures. (Something that does not directly impact my business.) I believe that these notices will be a total waste of money because few, if any, participant will read them. Fewer still will understand. Despite the dubious value, they must be generated. This will cost the vendor (typically the place where assets are held) money. These notices will not be generated at no cost. Where will that cost go? To raise underlying fees? To reduce rates of return? It will paid somewhere, and like most things, payment will not simply be a reduction of profit. It will be passed on if not in entirety, then in majority. So then the impacted programs look less attractive. Less attractive means fewer firms will have. Fewer plan adoptions will ultimately kill the existence of these plans. Is that good? I suppose in the age of the "nanny state" the concept of private retirement plans is an anathema? I think that this question needs to be asked as we watch Europe ignite into riots over a failure of government benefit plans to meet obligations. Should we strangle private pensions, making all retirees dependent on the government?

Perhaps I over reach in my conclusions. Perhaps as a national debt passes 17 trillion. Perhaps... ;)

While I agree with you that many (most) won't read or understand the disclosures at the participant level, that doesn't justify not giving them the information - lest we "become the nanny" that many rally against (e.g., "don't worry your pretty little heads about fees - they don't impact you..."). Only through knowledge can competition function, and only through information can knowledge be obtained.

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Perhaps, but do the benefits justify the cost. History is full of examples of good intentions bring about horrible unintended costs. Do you really believe that the costs to comply with what so far appears to be ridiculously complex rules and requirements, are justified? That old saying of don't throw the baby out with the bath water comes to mind. Were the complexities brought about by TRA 1986 worth the destruction of defined benefit plans for small employers? Keep in mind, I ask these questions from the position of not being someone who must provide these notices.

Having braved the blizzard, I take a moment to contemplate the meaning of life. Should I really be riding in such cold? Why are my goggles covered with a thin layer of ice? Will this effect coverage testing?

ERPA, QPA, QKA

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Just a thought. Wouldn't it be better to have the Plan Sponsor be provided with such disclosures allowing for a review with professionals who could seek out the best deals? Even with notifications a participant can't simply move his or her funds to another platform. Perhaps these notices just say here's some infor that you shouldn't really care about since there is really nothing you can do if you want to use the plan. Just a thought.

Having braved the blizzard, I take a moment to contemplate the meaning of life. Should I really be riding in such cold? Why are my goggles covered with a thin layer of ice? Will this effect coverage testing?

ERPA, QPA, QKA

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Even with notifications a participant can't simply move his or her funds to another platform. Perhaps these notices just say here's some infor that you shouldn't really care about since there is really nothing you can do if you want to use the plan. Just a thought.

All the publicity saying that participants will now be able to make better decisions seem to overlook this important detail!

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