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408b-2 Disclosures and the fiduciary rule


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With some recent threads regarding the fiduciary rule (is X a fiduciary under the new rule?), I wanted to revisit how people are handling their 408b-2 notices.

Is the fact that the fiduciary rule is now in effect changing your approach to your 408b-2 disclosures (or lack of 408b-2 disclosures)?  Or do you do 408b-2 disclosures for all clients regardless of covered service provider status?

 

 

 

 

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We do them for everyone - really just to have everything out in the open, and also, frankly, as a competitive issue - we don't want someone else to come in and trash us because we are "hiding" anything. So the fiduciary rule has no effect on us from that perspective.

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We're in the same boat as Belgarath - the fiduciary rule hasn't changed anything as we already were pretty transparent.

What is changing our approach, however, is recent experience with DOL audits of our clients.  Fee disclosure has been a hot button for a while, but recently is two separate audits, they are doing an incredibly deep dive into our business and how we disclose certain aspects of our collected fees (and for our group annuity book - they are dissecting the underlying structure of the GA to determine EVERY aspect of revenue for the company), and THEN, they are seeing if the client understand all of the minutia.  If not, they assess a penalty against the CLIENT for failing to be a good fiduciary who understands the concept of float on m&e expenses and VIP credits internal to a separate account held within a group annuity (which, of course, is not good for our business).

That has triggered a reevaluation of our approach to simplify, and make more understandable that which even the DOL doesn't understand (they can't comprehend the concept of a GA, separate accounts, and even asked why participants couldn't just directly invest in the underlying mutual funds).

National office has been involved as well, and our Groom has told us we are not alone.

 

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Fascinating. But for us, where we don't sell product, nor are we affiliated with anyone who does, we only have, sometimes, some minor Revenue Sharing that is paid to us by the platform (and we don't keep it anyway - we reduce our charges to the client by whatever we receive) and the Revenue Sharing is disclosed. So I don't think, hopefully, that the "deep dive" would apply to us.

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9 minutes ago, Belgarath said:

Fascinating. But for us, where we don't sell product, nor are we affiliated with anyone who does, we only have, sometimes, some minor Revenue Sharing that is paid to us by the platform (and we don't keep it anyway - we reduce our charges to the client by whatever we receive) and the Revenue Sharing is disclosed. So I don't think, hopefully, that the "deep dive" would apply to us.

We are very similar.  We don't sell product but for some clients we do have minor revenue sharing that we credit back to the client on a dollar for dollar approach.. We satisfy 408b-2 anyway for transparency.  Our disclosure is simple enough for for most people to understand.

 

 

 

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25 minutes ago, MoJo said:

What is changing our approach, however, is recent experience with DOL audits of our clients.  Fee disclosure has been a hot button for a while, but recently is two separate audits, they are doing an incredibly deep dive into our business and how we disclose certain aspects of our collected fees (and for our group annuity book - they are dissecting the underlying structure of the GA to determine EVERY aspect of revenue for the company), and THEN, they are seeing if the client understand all of the minutia.  If not, they assess a penalty against the CLIENT for failing to be a good fiduciary who understands the concept of float on m&e expenses and VIP credits internal to a separate account held within a group annuity (which, of course, is not good for our business).

Interesting.  That is probably effective though.  Clients don't care too much if their provider has to pay a fine because they assume the provider has deep pockets.  But fine the providers clients and the provider has a very real incentive to change or improve or whatever the DOL thinks is appropriate.

 

 

 

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3 minutes ago, RatherBeGolfing said:

Interesting.  That is probably effective though.  Clients don't care too much if their provider has to pay a fine because they assume the provider has deep pockets.  But fine the providers clients and the provider has a very real incentive to change or improve or whatever the DOL thinks is appropriate.

 

Oh, it's gotten a lot of attention - and they won't let go of the client.  We have one open audit that is approaching it's one year anniversary, and that alone is causing the client's temper to be shown.  Our General Counsel's office has told the DOL that if they want to audit us, "bring it on," but let our clients go!  They won't.

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MoJo, thank you for the information.

 

If you can indulge my curiosity:  What questions does an EBSA examiner to test whether a plan’s fiduciary really understands the indirect compensation?

 

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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On 6/17/2017 at 8:48 AM, Fiduciary Guidance Counsel said:

MoJo, thank you for the information.

 

If you can indulge my curiosity:  What questions does an EBSA examiner to test whether a plan’s fiduciary really understands the indirect compensation?

 

It is amazing how into the weeds they have gotten.  Our GA contracts, for example, have to be approved by the state regulators in each state we sell them - which is all of them except NY.  For consistency, they charge a set ""asset based fee" - universally, across the entire product line - BUT, then a "credit" is given back to the plan based on pricing (and attainment of certain asset levels).  They have questioned who earns the "float" on the charge taken before the credit is given - and test the employer to see if they know how it all works, and how much money is involved.  They like to interview the CEO - who isn't as focused on this as maybe others - but they want to see if the top of the house is knowledgeable about the "weeds."

It's clear also that the agents don't understand GA's and separate accounts, and asked us repeatedly why the participants can't just invest in mutual funds directly instead of through our separate accounts within the GA product.  It's simple - insurance companies can't sell investments "directly" and have to do so through an insurance product.  We think fees are transparent (and are not more than the NAV products we also sell through a different channel and in some cases less), but the DOL is simply confused.

They've also questions the "crediting rate" for our general account stable value product - and are questioning why it isn't more (thinking we are skimming fees somewhere within the general account that isn't disclosed.  Our SVF sets a crediting rate at the beginning of the year for the entire year, and they then have questioned what happens if we earn more than we credit on the account.  Of course, we make money.  But the converse is true as well - that is, if the general accounts makes less money than the crediting rate, we then lose money.  I doubt if the average CEO would fully understand - and hence the trap is set.

Stuff like that.

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On 6/16/2017 at 2:04 PM, MoJo said:

If not, they assess a penalty against the CLIENT for failing to be a good fiduciary

Good info.  I remember telling clients that they were the ones subject to penalties if they didn't follow up to get full disclosure. 

Ed Snyder

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On 6/16/2017 at 1:41 PM, MoJo said:

Oh, it's gotten a lot of attention - and they won't let go of the client.  We have one open audit that is approaching it's one year anniversary, and that alone is causing the client's temper to be shown.  Our General Counsel's office has told the DOL that if they want to audit us, "bring it on," but let our clients go!  They won't.

 

Only 1 year sounds wonderful to me! I have a couple of them that are going on 3 years. One was focused on fees. The other on the appropriateness of a particular asset.

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26 minutes ago, K2retire said:

 

Only 1 year sounds wonderful to me! I have a couple of them that are going on 3 years. One was focused on fees. The other on the appropriateness of a particular asset.

Yea, well, one year is eons for a client who sees this as a cloud hanging over their heads.

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  • 3 months later...

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