Legal Alert: DOL Proposes 408(b)(2) Disclosure Guide

by Eversheds Sutherland (US) LLP
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On March 12, 2014, the Department of Labor (DOL) published in the Federal Register a proposed amendment to its disclosure requirements for “covered service providers” to retirement plans under ERISA § 408(b)(2) that would require a separate “guide” if those disclosures are contained in multiple or lengthy documents. 

  • Effective July 1, 2012, those disclosures became necessary to qualify for the statutory exemption from the ERISA § 406(a) prohibition on services provided to a plan by a “party in interest,” including by an existing service provider.
  • At the time those requirements were finalized, DOL did not specify any particular form for these disclosures.
  • DOL did publish a “sample guide” that could be used on a voluntary basis, and reserved for a future rulemaking whether to mandate the use of a guide.
  • The proposed amendment would require such a guide in certain circumstances, effective 12 months after publication of a final rule. The proposal does not address whether the guide would be required for new arrangements only, or also for existing arrangements for which 408(b)(2) disclosures have already been provided.
  • The proposal would make no other change to the content, form, or delivery requirements for the disclosures themselves.  The preamble comments favorably on the electronic delivery of 408(b)(2) disclosures, e.g., on a readily accessible website for which responsible plan fiduciaries have clear notification about gaining access.

Under the proposal, a guide would be required if a covered service provider’s 408(b)(2) disclosures are contained either in more than one document or in a document in excess of a (to be determined) specified number of pages.

  • No guide would be required if the disclosures are contained in a “single, concise” document.  DOL sensibly recognized that, for the many 408(b)(2) disclosures that can be appropriately provided in a straightforward form, a guide would be a cost without a benefit.
  • DOL requested commentary on the page length criterion, including on page format and font size and other constraints to prevent manipulation of that criterion.
  • It is unclear what the single document or page criteria would mean for disclosures provided on separate or “running” web pages, for example.

The proposed guide would not be a summary of the disclosures.  Instead, it would be a roadmap to the location of all the required information in the disclosure documents, i.e., of:

  • The description of services provided;
  • The statement concerning services provided as an ERISA fiduciary or registered investment adviser;
  • The description of all direct compensation;
  • The description of all indirect compensation;
  • The description of any compensation paid among related parties;
  • The disclosure concerning compensation for any recordkeeping services provided; and
  • The disclosures about investment vehicles or options required of certain covered service providers.

For each of these disclosure elements, the guide would provide a document and page reference, or other “sufficiently specific locator” such as a section number or a hyperlink to each required element of the disclosure that would enable the responsible plan fiduciary to “quickly and easily” find the required disclosure. 

  • DOL referred to its previously published “sample guide” as illustrative of the approach it intends.
  • While the approach is conceptually simple, it is entirely predictable that there would be complexities in its execution.
  • Page references will not be technologically viable for a number of covered service providers, for example – a point about which DOL expressed skepticism in its regulatory impact analysis.
  • Also, the “quickly and easily” concept does not seem a reliable legal standard in a prohibited transaction exemption like the § 408(b)(2) regulations.
  • In addition, it is unclear what DOL intends for guides to disclosures that cover multiple separate services or products, such as those often provided by retirement platform providers or by broker-dealers.
  • It seems possible that the guide, if adopted, will cause some covered service providers to restructure their 408(b)(2) disclosures altogether.  If so, the deferral of the guide mandate will add to the cost of compliance with these new disclosure requirements.

Also, the guide would be furnished as a document separate from the disclosure materials, with the intent that it would be prominently identified to the responsible plan fiduciary reviewing the disclosures, and include contact information for a person or office available for questions about the location or substance of the disclosures.

  • It is unclear whether providing the guide on the cover of the disclosure materials would suffice, or what would constitute a separate document in an electronic delivery environment.
  • The contact information requirement apparently would be inapplicable to covered service providers not required to provide a guide (although many if not most 408(b)(2) disclosures already include that information).

Changes to the information provided in the guide would have to be furnished only annually.

  • In principle, this seems a more workable approach for both responsible plan fiduciaries and covered service providers than furnishing updated guides coincident with updates to the disclosures themselves, which (other than for certain investment information) are required within 60 days of a change.
  • If the guides for plans entering into new service arrangements are required to contain current information, however, then covered service providers would still need the capability to update the guide on a real-time basis, even if the changes need be communicated for existing arrangements only annually.

In its regulatory impact analysis, DOL estimated that there are approximately 12,000 covered service providers furnishing 408(b)(2) disclosures, and their additional cost to provide the guide would not exceed $22.2 million annually.

  • The estimate assumes that, for each unique service or product provided, it would take a covered service provider no more than four hours to identify the requisite disclosures, construct the guide and validate its accuracy.
  • The estimate appears not to take account of the cost, for example, of information technology infrastructure to support the guide or of guides that would have to be produced on a plan-specific basis.

DOL specifically requested commentary on numerous aspects of the proposal, signaling a possibility that any final rule could diverge materially from the proposal.  Comments are due June 10, 2014.  DOL also intends simultaneously to conduct focus groups among small plan sponsors to test the efficacy of current 408(b)(2) disclosures and of the proposed guide.  DOL expects to publish the results of its focus group testing after the close of the comment period, and may reopen the comment period in light of those results.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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