408b2 Disclosures

[austin3515]

Can I cross-reference the Amnerican Funds/John Hancock, etc., contracts for an explanation of the TPA Compensation that we receive?

[John Feldt ERPA CPC QPA]

Why not just attach a copy to your own agreement?

[austin3515]

Because it's 50 pages?

[four01kman]

Austin, if you are the covered service provider, I think you must explain all compensation received. Remember, your client is going to review the information you send to determine if they should continue to retain you.

[austin3515]

" if they should continue to retain you. "

My clients LOVE me

[MoJo]

" if they should continue to retain you. "

My clients LOVE me

Famous (last) words..... I know some people who would "love" to know who your clients are!

[austin3515]

Too bad for them I'm a secret agent

[12AX7]

Many of the platform providers that pay indirect compensation have sample disclosures that you can use/modify, etc. Some however are better than others.

[Bird]

Well. the American Funds service agreement that I know is maybe 8 pages. JH's is, I suppose, longer, as they are more expensive and try to create a cloud of confusion over the whole thing.

Anyway, I decided to take it head-on and wrote a letter that I had them sign, if I or my firm was receiving any indirect compensation.

Back to your question: if your clients signed something that included a description of what you are receiving from an investment provider, then I suppose that is adequate.

[austin3515]

What I struggled with, Bird, is the fact that I as a service provider am required to tell my clients what I'm getting paid (at least as I read the rules).

So what I've decided on is to provide a short 30,000 foot explanation of what we receive and reference them back to the services contract with John Hancock. So my JH disclosure for example, would state "we receive 5bps of plan assets per year." [i know there is another installation piece which I'll also mention]. I think that is enough disclosure to tell them what I am getting paid.

Does anyone disagree that this strategy would not meet the spirit of the disclosure? I should think the DOL would actually like this straightforward approach cosndiering their contemplation of a summary requirement, whicn in my hear tI believe is due to the 6 page disclosures which might dilute the crux of the disclosure.

[Jim Chad]

Austin:

I think you are on the right track. I am doing it basically your way.

[austin3515]

Excellent, Jim, I'm glad I'm in good company!

[Bird]

I think that's what I'm saying/doing too. I thought you meant you were going to say "The DOL says we have to disclose compensation received from your plan - it's in the contract; go look at it if you want to."

[austin3515]

Well yes, that is exactly what I originally hoped I culd say, but I'm just not sure that that = me disclosing my compensation. Are you suggesting that a complete and total cross-reference might actually work?

I guess it might just be too gray to hang my hat on.

[austin3515]

Bird, this language is straight from the regs. What is the basis for saying that we can even cross-reference as you suggest? It seems to me that as a covered service provider I need to be the one providing the disclosure. I really really like your answer, but can you point to the basis for the conclusion please?

(iv) Initial disclosure requirements. The covered service provider must disclose the following information to a responsible plan fiduciary, in writing—

(2) Indirect compensation. A description of all indirect compensation (as defined in paragraph ©(1)(viii)(B)(2) of this section) that the covered service provider, an affiliate, or a subcontractor reasonably expects to receive in connection with the services described pursuant to paragraph ©(1)(iv)(A) of this section; including identification of the services for which the indirect compensation will be received and identification of the payer of the indirect compensation.

[Bird]

You've got me confused as to what you are thinking and even what I'm thinking, but I guess I would summarize my position as: I chose to take it head-on and write a letter clearly, I think, disclosing my or my firm's compensation. But if you had a contract that already covered everything, albeit taking many pages to do it, that should be adequate, I'd think. I imagine the bigger the firm, the more lawyered-up they'll be, and their disclosures will look more and more like a contract anyway (and less and less clear).

[austin3515]

Bird, I think we are saying almost the exact same thing. The improtant thing I guess is that we're making disclosures.

I came across something else that I was totally shocked by. Am I correct that if we get NO indirect compensation as the TPA, then we have NO disclosure requirements, even if some of our fees are paid from plan assets? Take for example an FBO account plan.

[Lou S.]

Bird, I think we are saying almost the exact same thing. The improtant thing I guess is that we're making disclosures.

I came across something else that I was totally shocked by. Am I correct that if we get NO indirect compensation as the TPA, then we have NO disclosure requirements, even if some of our fees are paid from plan assets? Take for example an FBO account plan.

You have to disclose if you are getting direct or indirect compensation, assuming you'll meet the minimum requirement ($1,000?). So if they are paying your fees from the trust that has to be disclosed.

If the client is paying 100% of the fees outside plan assets (or from forfeitures - which I thought was an odd exception), then you don't need a disclosure.

If the client "can" pay expenses from the trust but doesn't do so, then you don't need to disclose as the DOL said that would be confusing but if they later decided to actuially charge then a disclosure would be required at that time.

That's my uderstanding but if I'm wrong I'd like to know.

[austin3515]

That's what I thought too, but you are wrong. Which I think is good news, because we can probably send out a lot fewer notices...

http://www.asppa.org/Document-Vault/PDFs/T...2011-408b2.aspx

I'm curious to know if others are still sending to everyone regardless of whether or not they receive direct or indirect.

[GMK]

I think you are correct. Plan sponsors already know how much they pay you themselves and from the plan. The disclosures are to let us know your other sources of revenue related to the Plan.

Now, if you don't get any indirect and don't have to send a disclosure, let me suggest that you send a form letter to that effect to the plan sponsors. It will give the sponsor a document showing that you know what's going on, and it could save you some telephone time trying to explain why you didn't send the sponsor a fee disclosure. Just a thought.

[Below Ground]

Just curious, but does anyone else find these disclosures as "regulations gone wild", especially, the 404(a) participant notices. Since this thread is directed at the "b" notices, let me first say something there.

As stated earlier in the thread, clients do (or should) know what we as TPAs are being paid. Sending them a notice on this effect is not likely to inform a client on what I am being paid. Why? Do your clients carefully read everything you send them. I find that most clients have no desire to get anything else from me that they need to read. They just want me to take care of what needs to be done with the least amount of effort on their part. My sending this disclosure is not going to make clients think about whether my fees are competitive. Instead, this will be something they will simply "round file".

As a TPA who rarely accepts revenue sharing (I often have my share given to the broker), my clients universally know what I am being paid. Why? They write the check, that's how. I also have every client sign a service agreement on "day one" which clear staes fees and services.

The "a" notices are just nuts. Getting the typical participant to read an election form is a feat! Does anyone really think participants are going to read these detailed notices, reviewing the comparative charts, reaching informed choices? Who believes in the tooth fairy?

Perhaps fees should be more transparent. I can see that, but these notices to participants will not have that effect. I see them as simply something that will intimidate the average participant, and most definitely raise the cost of servicing plans. Is that what is desired? By most observations, TRA 1986 hurt defined benefit plans. Those rules made sponsorship by a small firm to become too costly in many cases. Is that the intent of the 404(a) participant notices? Make plans with self directed accounts disappear?

Well, that was my annual venting. Thanks for listening.

[austin3515]

Here here!! (or is it hear hear??). Regardless, I AGREE!!!

[Belgarath]

We decided to disclose on all plans. In the long run, safer and, arguably, easier than explaining to clients why you DON'T have to disclose.

The issue of whether a TPA falls under the category 2 "platform recordkeeper" for example, can sometimes be murky at best. And I wouldn't count on the DOL giving the benefit of the doubt.

Additionally, I think it could be a competitive issue. If you aren't doing the disclosure, even if it is not required, for an ERISA plan potentially subject to disclosure, then you open the door for someone to go in and scare your client, "Your current TPA isn't disclosing? That's terrible. You should move your administration to us - look at the package we prepare. We believe in full disclosure and not hiding anything." etc., etc...

However, believe me, I'm not faulting anyone who doesn't do a disclosure if they are not required to!

[MoJo]

Just curious, but does anyone else find these disclosures as "regulations gone wild", especially, the 404(a) participant notices. Since this thread is directed at the "b" notices, let me first say something there.

As stated earlier in the thread, clients do (or should) know what we as TPAs are being paid. Sending them a notice on this effect is not likely to inform a client on what I am being paid. Why? Do your clients carefully read everything you send them. I find that most clients have no desire to get anything else from me that they need to read. They just want me to take care of what needs to be done with the least amount of effort on their part. My sending this disclosure is not going to make clients think about whether my fees are competitive. Instead, this will be something they will simply "round file".

As a TPA who rarely accepts revenue sharing (I often have my share given to the broker), my clients universally know what I am being paid. Why? They write the check, that's how. I also have every client sign a service agreement on "day one" which clear staes fees and services.

The "a" notices are just nuts. Getting the typical participant to read an election form is a feat! Does anyone really think participants are going to read these detailed notices, reviewing the comparative charts, reaching informed choices? Who believes in the tooth fairy?

Perhaps fees should be more transparent. I can see that, but these notices to participants will not have that effect. I see them as simply something that will intimidate the average participant, and most definitely raise the cost of servicing plans. Is that what is desired? By most observations, TRA 1986 hurt defined benefit plans. Those rules made sponsorship by a small firm to become too costly in many cases. Is that the intent of the 404(a) participant notices? Make plans with self directed accounts disappear?

Well, that was my annual venting. Thanks for listening.

Regulations gone wild? Maybe. Maybe not. I'm always amazed at how much compensation "some" receive, and how little they do for it (anual meetings and a few one on ones with "some" (read, VIP) participants), for 50bps. Keep in mind, though, if your clients write you a check from corporate coffers, you have no obligation to disclose anything. These regs are ONLY about comp paid BY THE PLAN.

[austin3515]

"The issue of whether a TPA falls under the category 2 "platform recordkeeper" for example, can sometimes be murky at best. And I wouldn't count on the DOL giving the benefit of the doubt."

Where would it get murky? FBO Accounts? Except for the DOL's recent shoot-from-the-hip commentary regarding FBO's including DIA's when many participants use the same funds, I thought it was pretty well agreed upon that FBO accounts by definition do not have DIA's (and therefore could not be recordkeeping).

I was thinking of sending the disclosures to everyone for exactly the reason you mentioned. EVeryone and the mother is emailing all their clients to tell them to make sure they get their disclosures. Just not sure if we're going to do it before 7/1, but I think we probably will eventually. Might include it as an attachment to our year-end letter or something.

[Belgarath]

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?"

[austin3515]

"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."

I'm not sure what you mean by this?

[Belgarath]

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.

[austin3515]

. Depending upon what interpretation you prefer.

What is the other interpretation? I'm scratching my head trying to come up with any other interpretation?

[Belgarath]

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.

[austin3515]

(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.

[Belgarath]

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.

[goldtpa]

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.

[austin3515]

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.

[goldtpa]

austin3515-I am just telling you what the DOL rep told me.

[austin3515]

I'm just telling you that in my experience the folks who answer the phone have the same questions that we do (as I think your conversation supports). i.e., don;t rely on what they tell you too much.

[ERISA13]

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!!

[austin3515]

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.

[Belgarath]

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!

[ERISA13]

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!

[austin3515]

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.

[DMcGovern]

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)?

[austin3515]

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.

[DMcGovern]

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?

[austin3515]

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.

[Below Ground]

@ 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...

[MoJo]

@ 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.

[Below Ground]

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.

[Below Ground]

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.

[K2retire]

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!