Bradford P. Campbell, of Counsel Schiff Hardin LLP, and former U.S. Assistant Secretary of Labor for the Employee Benefits Security Administration (ERISA), told attendees at PLANSPONSOR’s National Conference that they can look for more rules on fee disclosure. He pointed out that the Employee Retirement Income Security Act Section 408(b)(2) provides that fees for services be reasonable and not violate prohibited transaction rules, but this does not cover the non-ERISA plan universe.
According to Campbell, Congressional legislation being worked on would cover the non-ERISA space but not defined benefit plans, while rules pending from the Department of Labor would cover both.
Jason C. Roberts, Partner at Reish & Reicher, said the new legislation or regulation will set out clear rules for fees for services and compensation for providers. Sponsors will clearly know what to report on Form 5500 Schedule C, and providers will have to address prohibited transactions.
The differences in the Congressional and DoL proposals come from the participant disclosure debate, Campbell said. The DoL says participant disclosures should be simple, while Congress says they should be detailed. Proposed legislation from U.S. Representative George Miller (D-California) would require sponsors to disclose any fees that will or even could be changed.
Campbell says sponsors can either look for initial rules from the DoL soon (see Fee Disclosure Is to Ultimately Help Participants Make Informed Choices) and participant disclosure rules in the fall, both to be effective next year, or Congress will issue legislation that will be effective in 2012.
Advice and Fiduciary Concerns
Campbell next addressed participant advice regulations, noting that the current rules propose a computer model based on generally accepted investment theories. The issues still to be addressed are whether the DoL decides what are generally accepted investment theories and the criteria the computer model is allowed to consider when choosing investments.
Campbell says if the computer model looks at two funds in the same asset class, fees can be considered but not past performance. This means that between active versus passive funds, passive funds will always be selected.
He told attendees that clarification is expected in the fall.
Roberts told conference attendees that the DoL is planning to issue a proposal to redefine the definition of fiduciary under ERISA. He said it will primarily affect advisers, but when advisers are examined, their plan clients usually are also.Roberts says plan sponsors might want to revisit their contracts with providers to determine whether they are giving advice. He contends that the next wave of rules will address cross-selling – providers capturing rollovers or selling other products and services to participants – and the DoL wants to prevent abuse of fiduciaries cross selling.
Jennifer Eller, Principal, Groom Law Group, says the new financial reform legislation also includes provisions that will affect plan sponsors and providers. The legislation includes rules on over the counter derivatives, used by defined benefit plans to hedge against risk, and while these plans won’t be regulated but swaps, which include wrap contracts in stable value funds, must be cleared and the issuer must be a major issuer.
The legislation also impose a fiduciary duty to advisers, and regulates advisers to private funds, primarily with regards to hedge fund investing. Eller says plan sponsors that advise their own defined benefit plans would have no exemption from registering as investment advisers under the rules.
In addition, Eller says rules on banks would prevent them on investing in hedge funds even at the direction of plan sponsors.
On a final note, the attendees addressed the 401(k) compliance questionnaires that have been sent to plan sponsors. Campbell says the results will be a tool for future use by the DoL and Internal Revenue Service. Roberts warned sponsors not to ignore the questionnaire and to let their legal counsel review their responses.
He told advisers that even if a sponsor didn’t get a questionnaire, the adviser can use the news of the mailing to jump off a review of clients’ plans and practices.Audio of the panel presentation is here.