So Long Mandated Fee Disclosure (At Least For Now)
Thursday, January 15, 2009 at 10:02AM Josh Itzoe On the heels of my interview with Fred Reish last week, he sent an email informing me that the the DOL apparently announced yesterday that they are withdrawing the 408(b)(2) regulation from consideration. The regulation regarding disclosures to participants was also withdrawn.
According to Fred, it appears that the consequence will be that the regulations will be re-worked by the DOL after the new Assistant Secretary has been appointed, although the specifics are unpredictable at this time.
He also suggested this could open the door for legislation sponsored by Congressman George Miller, which could be more burdensome than the regulations would have been.
I have to say that I am disappointed with this news as I felt these changes would bring new (and needed) transparency to retirement plans and it is important that this happens sooner rather than later.
That being said, I think the scrutiny on fees over the past year, even without 408(b)(2) moving forward in its current form, will have three positive outcomes:
- Prudent plan sponsors will continue to put greater emphasis on the fees and conflicts associated with their plans and will require greater disclosure from service providers. Those service providers who resist will "weed" themselves out of the business of servicing retirement plans.
- This process will bring to light many weaknesses in the system and ultimately have a positive impact on improving the performance of retirement plans and the outcomes for participants.
- The best and most successful service providers will be the ones that help clients develop and follow a prudent oversight process. Proactive disclosure and transparency is critical to a prudent approach and always a good best practice, whether legally mandated or not.
Without the regulation, it is even more important that plan sponsors use this DOL/SEC resource and ask these questions when dealing with current or prospective services providers.
Stay tuned!
Reader Comments (2)
Josh,
I agree that this news is disappointing. I think many of us in the business were hoping for some kind of clarity in 2009 on these new rules. Ultimately, I feel that all this did was delay the inevitable which is to say that fee disclosure and clarity will eventually rule the day. Right now the best a plan sponsor can hope for is to chose the right partners who are focused on improving outcomes for participants because that is what it is really all about.
In my recent travels, one major conflict of interest does keep rearing its ugly head and it is front of mind from many advisors who have Broker Dealer affiliations. The issue is their role to the plan (fiduciary or not), how it is disclosed to the plan sponsor and whether or not their Broker Dealer actually allows them to function in that capacity. Many advisors have complained to me that they already play a functional fiduciary role (at the least) and that the B/D refuses to acknowledge that role and puts their heads in the sand on this issue. Many of these B/Ds are struggling with the issue themselves and may eventually move to a specialist system which would reduce the number of advisors allowed to serve Retirement Plans. One thing that the 'threat' of 408(b)(2) has done is force these advisors to rethink their business model and their affiliations.
Even with the delay and the eventual re-working, I believe that many advisors will start defecting from their current B/Ds to more fiduciary friendly environments at alternate B/Ds or to their own RIAs. With this will come motion in the providers currently serving plans as commission-based starts to shift to fee-based. That bodes well for the providers who serve Plan Sponsors prudently and are comfortable in an ERISA fiduciary role and allow advisors to serve in a true fee-based environment.
Josh, keep up the good work. Our industry needs missionaries like yourself.
Thanks for the kind words, Jason. I couldn't agree more with your analysis of the situation.
Interestingly, I think a reduction of advisors due to a move toward specialization would be very beneficial for plan sponsors and participants. As we are readily seeing in the financial services industry (think the Citigroup ""financial supermarket" approach), you can't be all things to all people. The idea of providing a "one-stop shop" is great in theory but extremely difficult (if not, impossible) to pull off. As we've concluded in our firm, you can't be an expert in retirement plans and in dealing with private clients. Each area requires too much specialization. I have no doubt that those advisors who choose to specialize in the retirement plan area will be the ones who compete effectively in the future.
I'll be interested to see how the B/D community responds. At some point, I would think they have to take their "heads out of the sand" on the issue of acknowledging fiduciary responsibility. I just wonder if it will be too late. Thanks for posting and the great insights!