When they are adopted, these guide requirements should make it easier for plan sponsors to find the information they need to assess whether a service arrangement and the compensation are reasonable, Ashton says. However, covered service providers will have to furnish a separate document that details where the plan sponsor can find required information—“and plan sponsors must know they are supposed to receive this document,” Ashton tells PLANSPONSOR.
Ashton stresses that this is crucial information, because if plan sponsors do not receive the guide along with the required disclosures, they need to ask for it. And if they still don’t get it, that failure has to be reported to the DOL, and the service agreement must be terminated.
Failure to do this, Ashton says, means the plan sponsor fiduciaries have engaged in a prohibited transaction—and could thus be personally liable to restore funds to the plan.
A fiduciary’s need to know what they are required to get from the service provider, and to ask for it if they don’t get it, is not new, Ashton says. But, the requirement that service providers give another item of disclosure is new. And fiduciaries must know about this so they can add it to their checklist of items to look for and ask for, if it is not received, to avoid engaging in a prohibited transaction.
Ashton emphasizes that service providers need to be aware this amendment to the regulation is going to be finalized. He recommends they begin the process of designing their guide and working with their systems people on the mechanics of populating it and delivering it to prospective clients—possibly the most important step service providers can take.
Since the DOL has asked for comments on varied issues, service providers should decide if they want to comment. Issues include the page number limitation for when they need to provide the guide, how to provide the specific location--by page number, or section number, or a link on website, and whether the information can be provided electronically?
This new requirement will apply only prospectively, says Ashton. “This is not stated explicitly in the proposal, but there is an indication that the requirement will only apply on an effective date in the future, as yet unknown,” he says. There is no indication that the DOL intends for service providers to go back to existing clients to provide the guide. “Service providers may want to comment on this just to get an affirmative response from the DOL that this is the intent.”
A requirement to provide a notice of changes in the disclosures previously made to plans already exists, Ashton notes. “It appears that the amendment to the regulation will require that the service provider also send out an annual notice of any changes to the guide if there have been changes to the disclosures,” he says. He adds that service providers may want to comment about this requirement as well to see if there is a way to avoid duplication of effort when changed information needs to be sent out.
The proposal doesn’t seem to have anything especially tricky, Ashton says. “The DOL has gone to great lengths to make it clear that service providers can make the disclosures in any format they want as long as it gives plan fiduciaries a clear indication of where to find the information,” he says. “However, where a registered investment adviser (RIA) incorporates its Form ADV by reference in its disclosures, it will probably need to provide the guide.”
The need to do this could trip up some RIAs, he says, who may think they don’t have to do this. Some third-party administrators that may receive indirect compensation may also be impacted if they use a brochure or other disclosures from a plan provider to disclose this compensation. Ashton points out that they may not realize they will probably be covered by this guide requirement.
Ashton says some providers could be lulled into thinking they have complied with the guide requirement, because of the reference to an “other specific locator, such as a section.”
“Suppose they refer, in their guide, to a section of a document that is 20 pages long?” Ashton theorizes. “My suspicion is that this won’t be considered by the DOL to comply with the requirement of the reg. The point is that providers will need to be aware of the spirit of the reg, and not just the words.”
Participants will most likely remain unaffected by the requirement, Ashton says. “To the extent the requirement helps their employers to analyze their service providers and potentially negotiate better deals, it may help participants in the long run. But I don’t see any short term impact, either good or bad."
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