Everyone who reads this article probably heaved a sigh of relief on July 1 of last year -- when they completed their initial wave of 408(b)(2) disclosures. I know that we did and our clients did.
However, we are now starting to receive questions about the little-publicized 408(b)(2) requirement for subsequent disclosures of changes. For example, we are getting questions about situations where broker-dealers have negotiated revenue sharing or other financial arrangements with mutual funds that were not included on the original disclosure list. Similar circumstances could affect recordkeeper… for example, a change in the payments from mutual funds or their affiliates, or compensation from new or replacement investments in a plan’s lineup.
Under the 408(b)(2) regulation, a covered service provider—such as a broker-dealer or a recordkeeper—must provide additional written disclosures to plan sponsors (or responsible plan fiduciaries, as the regulation refers to them) whenever there is a change to the required information.
These changes would include any increases or decreases in the compensation to the broker-dealer or recordkeeper. That would also include changes to any indirect payments being received by the broker-dealer or recordkeeper. As a result, it could include an increase or decrease in a percentage or dollar amount -- or a new type or source of payment that was not previously made. Obviously, newly negotiated payments from mutual fund families would be such a change.
There are similar issues for RIAs, broker-dealer and TPAs where they qualify for "bonus" payments, or subsidies, from recordkeepers or insurance companies because of the level of production or relationships with the provider… if the disclosures were not previously made.
However, it is only a "change" for the plan it affects. So, if a covered service provider provides services to 1,000 ERISA retirement plans, but only 50 of those plans are affected by a new arrangement with a mutual fund (that is, if only 50 of the plans hold that particular mutual fund), the written disclosure only needs to be made to those affected plans. As a result, providers will need to keep records of which plans hold which investments.
As with any 408(b)(2) disclosure of indirect compensation, the change disclosures must include:
- Amount (which can be expressed as a percentage or formula)
- Services to the plan
- Arrangement with the payer (that is, why is the payer making the payment?)
Also, and somewhat problematic, the disclosures have to be made within 60 days of the provider becoming aware of the change. Unfortunately, that provision is difficult to confidently apply to this type of situation. Arguably, the provider became aware of the change when the new agreement with the mutual fund or its affiliates was executed… and that is the start of the 60-day disclosure period.
We are often asked if those disclosures can be made once a year. As the 60-day rule suggests, the answer is no. The written disclosures must be made in accordance with the 60-day requirement. Also, the disclosures cannot just be posted on a website. Our reading of the 408(b)(2) regulation (which, admittedly, is not entirely clear) is that they should be "delivered" to the responsible plan fiduciaries. Fortunately, though, they can be delivered via e-mail. As a result, service providers should collect and maintain e-mail addresses for the responsible plan fiduciaries for their ERISA plans.
Post Script: The change requirement applies to all covered service providers. For example, if an RIA agrees to provide new services (e.g., an RFP for a provider or a fee and expense analysis), that is a change for which a 408(b)(2) disclosure is required.