Participant Disclosures - What does non-compliance mean?

[austin3515]

Let's say sponsor does not comply with these rules, and they send out incomplete information, or they don't do anything.

1) Is this an explicit fiduciary breach subject to the 20% penalty?; or

2) Have they simply lost their safe harbor.

I am looking through the brokerage window disclosure requirements, and I fear that "FBO, Inc." does not have these disclosures.

Does anyone have a sense for whether or not participants will be receiving those disclosures from any of the FBO providers (i.e., fees, commissions, trading charges, account maintenance, etc), perhaps incorporated into the statements? Or perhaps a pdf document available for download?

[MoJo]

Let's say sponsor does not comply with these rules, and they send out incomplete information, or they don't do anything.

1) Is this an explicit fiduciary breach subject to the 20% penalty?; or

2) Have they simply lost their safe harbor.

I am looking through the brokerage window disclosure requirements, and I fear that "FBO, Inc." does not have these disclosures.

Does anyone have a sense for whether or not participants will be receiving those disclosures from any of the FBO providers (i.e., fees, commissions, trading charges, account maintenance, etc), perhaps incorporated into the statements? Or perhaps a pdf document available for download?

After pondering this question for some time, debating it with other professionals, and actually going back to reread the regs yet again, I think the "best" (for now) answer is "yes, according to the DOL" a failure is a breach of fiduciary duty (the remedy for which is yet to be determined, most likely through litigation a few years hence) *AND* you lose 404© protection (for whatever that may be worth), as the required disclosures have also been made an essential part of complying with the 404© regs.

The reason I say "according to the DOL" is that while properly issued regulations are certainly a weighty and persuasive interpretation of what is required to comply with the statute (and remember, these regs are attached to the part of ERISA that defines the exclusive purpose rule and the prudent expert standard), they are not necessarily the only means of comlying with the the requirements of the statute, or even the correct way to comply. I used to work with an attorney - Dean Hopkins - who successfully won such an argument before the Supreme Court, challenging the IRS' regs that defined professional corporations as nothing but partnerships - and thus treated professional corporations (this case involved a medical practice) for benefit purposes as partnerships (which back then did not allow partners to be "employees" for purposes of receiving benefits).

Beyond that, remedies for a breach of fiduciary duty involve, essentially, restitution to the trust for losses suffered as a result of the breach (an "equitable remedy, and not a "legal" (money damages remedy)). One has to question whether the lack of disclosure has anything to do with the actual reasonableness of the fees. That is, if the fiduciary is actually on top of the fee issues, and has done everything appropirately but disclose to participants under the 404(a)-5 regs, what actually is the damage to the trust? I can see the loss of 404© protection as giving rise to some liability (although it would be hard for a participant to argue that "but for" the disclosure, they would have made different investment decisions).

Now, would I recommend someone challenge the regs as being the only way to comply? ABSOLUTELY - but I won't do so on behalf of any of my clients. I really would like to see someone else blaze that trail, and I'll sit back and watch....

Just my 2 cents worth....

[austin3515]

Now, would I recommend someone challenge the regs as being the only way to comply? ABSOLUTELY - but I won't do so on behalf of any of my clients. I really would like to see someone else blaze that trail, and I'll sit back and watch....

Are you suggesting that today there is a realistic means of complying? IF so, what is it, please tell me! Aside from a 404a5 blanket disclosure from the fund company, I just don't see how it is attainable. Has anyone seen anything??

[MoJo]

Now, would I recommend someone challenge the regs as being the only way to comply? ABSOLUTELY - but I won't do so on behalf of any of my clients. I really would like to see someone else blaze that trail, and I'll sit back and watch....

Are you suggesting that today there is a realistic means of complying? IF so, what is it, please tell me! Aside from a 404a5 blanket disclosure from the fund company, I just don't see how it is attainable. Has anyone seen anything??

Yes, sure. You can comply with the exclusive benefit rule and the prudent expert standard without disclosing anything to participants. Show me in ERISA where it makes a fiduciary disclose fees to be in compliance with those fiduciary responsibilities. ONLY in the regulations (which are but one interpretation of the law) is that action spelled out. Now, complying with 404© - that is a different matter - as the protection afforded by that section in ERISA itself, specifically is dependant upon compliance with "regulations issued by the Secretary." ERISA Section 404(a) contains no such reference to regs issued by the Secretary.

Would I recommend ignoring the regs (provided you followed a prudent process and actually determined that all fees payed by the plan were reasonable)? Nah. I'm conservative and prefer to read about others who have tried it, and then advise my clients accordingly.

[austin3515]

So what are you advising your clients to do who invest in FBO accounts, where the provider has nothing to offer?

[MoJo]

So what are you advising your clients to do who invest in FBO accounts, where the provider has nothing to offer?

The regs spell out base information to provide (if there are any opening, maintenance or other transaction fees). We're not concerned with underlying investments (at this point), and have all other covered service providers that may tap the accounts (though we haven't found any, actually) provide an appropriate disclosure. Tie a ribbon around it, and send it out (although we haven't that many to deal with).

[austin3515]

I have around 100 and they are all over the place. Good luck to me.

[MoJo]

I have around 100 and they are all over the place. Good luck to me.

I'd buy an espresso machine if I were you....