Business Compliance Partners Provides Compliance Guidance for ERISA Section 408(b)(2) Disclosure Requirements

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Firms who provide investment advisory, securities brokerage, insurance, third party administration and certain other services to 401(k), 403B, defined pension, and profit-sharing plans will be required to comply with the new Employee Retirement Income Security Act (ERISA) Section 408(b)(2) disclosure requirements.

Section 408(b)(2) establishes specific disclosure obligations for retirement plan service providers to ensure that responsible plan fiduciaries are provided the information they need to make better decisions when selecting and monitoring service providers for their plans.

Required disclosures must be furnished in writing to a responsible plan fiduciary for the covered plan. The rule does not require disclosure in a formal written contract but much of this information is typically included in a written agreement.

The ADV Part 2A Brochure is the primary disclosure document of a registered investment adviser. In addition, every service that an adviser will provide must be covered by a written agreement. The agreement must disclose the nature of the services being provided and if applicable, whether services will be provided on a discretionary or non-discretionary basis.

The agreement must also disclose how fees are calculated, when fees are payable, (in advance or arrears, on a quarterly or monthly basis,) and how clients may get a refund if the agreement is terminated prior to completion of the services or its expiration date.

Advisers must make the following disclosures:

  •     A description of the services to be provided and all direct and indirect compensation to be received by the adviser, its affiliates, or subcontractors. ("Direct compensation" is compensation received directly from the covered plan. "Indirect compensation" generally is compensation received from any source other than the plan sponsor, the adviser, an affiliate, or subcontractor.
  •     Advisers disclosing "indirect compensation" must also describe the arrangement between the payer and adviser for the payment of indirect compensation and must identify the sources for indirect compensation, plus services to which such compensation relates.
  •     Compensation disclosures must include allocations of compensation made among related parties (i.e., among affiliates or subcontractors) that result from charges made against a plan's investments or are set on a transaction basis.
  •     Advisers must disclose whether they are providing recordkeeping services, including compensation attributable to such services, even when no explicit charge for recordkeeping is identified as part of a service "package" or contract.
  •     Some advisers must disclose an investment's annual operating expenses (e.g., expense ratio) and any ongoing operating expenses in addition to annual operating expenses. For participant-directed individual account plans, such disclosures must include "total annual operating expenses".
  •     There is a "pass-through" exception for investment-related disclosures furnished by recordkeepers or brokers. An adviser may provide current disclosure materials of an unaffiliated issuer of a designated investment alternative, (or information replicated from such materials), provided that the issuer is a registered investment company (i.e., mutual fund), an insurance company qualified to do business in a State, an issuer of a publicly-traded security, or a financial institution supervised by a State or Federal agency.

Required disclosures may be made in one of three formats (or in combination):

  •     As part of the written agreement
  •     As part of the ADV Part 2A Brochure
  •     By using a separate written disclosure document (if an adviser wishes to keep disclosure information private)

Use the following link to get a sample separate written disclosure document.

The disclosure requirements do not apply to simplified employee pension plans (SEPs), SIMPLE retirement accounts, IRAs, and certain annuity contracts.

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Paul Cox

Chris Kosifas
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