Are Your 408(b)(2) Disclosures Sufficient?

By ASPPA Net Staff • November 01, 2017 • 0 Comments
Fred Reish is worried about your 408(b)(2) disclosures.

Well, maybe not yours specifically — but in a recent blog post he cautions that “some service providers may be making disclosures that don’t satisfy the standards.” As a result, he suggests that “broker-dealers, RIAs, and insurance agents and brokers review their disclosures to make sure that they are comfortable that the necessary information is being provided to plan fiduciaries.”

The call for a review comes from the change in the definition of fiduciary advice (which applied on June 9, 2017). The 408(b)(2) regulation requires certain service providers to ERISA-governed retirement plans to make disclosures to plan fiduciaries of their services, compensation and “status,” in the case of the latter if they were fiduciaries under ERISA and/or the securities laws. Up until now, many broker-dealers had taken the position that they were not fiduciaries and therefore did not need to make the fiduciary disclosure. Or had until the fiduciary regulation’s June 9 applicability date, after which many may find their status changing which would then require an update to the 408(b)(2) disclosure.

Reish says that retirement plan service providers may find it worthwhile to review prior 408(b)(2) disclosures, and that the first level of review should be to determine whether prior 408(b)(2) disclosures to ERISA retirement plans affirmatively stated that they were not fiduciaries to the plans that they served. If so, since they now are fiduciaries, those broker-dealers need to send out new 408(b)(2) disclosures that affirmatively disclose that newfound fiduciary status (assuming that their advisors became fiduciaries under the new rule, which Reish notes would ordinarily be the case).

On the other hand, if the old disclosures were silent about fiduciary status or non-status, Reish says that the prior disclosures would only need to be reviewed to determine if they adequately describe the services that would be considered to be fiduciary advice, such as making (or as Reish notes, suggestions of…) investment recommendations, referring to other investment advisors or managers, or providing selective lists of investments.

Also part of the review: consideration of whether the 408(b)(2) statements adequately disclose compensation. Reish notes that he has been reviewing 408(b)(2) disclosures for a number of broker-dealers and as part of that, he has noticed that compensation was often described in “ranges, sometimes very broad ranges.”

Reish notes that the purpose of the 408(b)(2) disclosures “is to allow the responsible plan fiduciaries to determine (i) whether the compensation paid to the advisor and affiliates is reasonable in light of the services being rendered, and (ii) the nature and extent of the conflicts of interest.”
He cautions that, bearing in mind the dual purpose of the disclosures, firms should “think about whether the disclosures adequately inform the responsible plan fiduciaries, so that they can make prudent decisions on behalf of their plans and their participants.”