Charles Epstein

ContactCharles D. Epstein, CLU, ChFC, AIF® is the founder of The 401k Coach® Program, an organization dedicated to providing great clarity, confidence and capabilities to Advisors, Plan Sponsors and Plan Participants.
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The 401k Coach

Finding The “Pea-Guy” In 408(b)(2) Final Reg. Fee Disclosure!
Charlie Epstein    Thursday, August 19, 2010 09:17

Remember the guy on the street corner with the little table and the three walnut shells?
 
He would call out to an unsuspecting passerby, “$25 to find the pea, $25 to find the pea. “

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Living in New York City, I used to love watching this guy in action, as a small crowd of unsuspecting tourists would crowd up to his table and watch the “stooge” (his partner) win over and over again. Encouraged by the strangers ease and rapid success, one tourist after another would try their hand in a game of chance and little transparency!
 
And one by one, the unsuspecting tourists would fall prey to the swift slight of hand of the “Pea-Guy” who would magically take their $25 every time!
 
On July 16, 2010, the Department of Labor’s (DOL) interim final regulation under ERISA 408(b)(2) (the “final” regulation) was published in the Federal Reserve, and with it begins the demise of the “Pea Guy” in the 401k industry!
 
The DOL has finally done what New York City’s Police have been unable to do, eliminate shady practices to unsuspecting civilian participants!
 
In a “nut-shell,” 408(b)(2) mandates full disclosure of retirement plan advisors and vendor services, fiduciary status, and compensation. Previous rules did not provide full disclosure, and at present it can be remarkably difficult for plan sponsors to figure out where the compensation “pea” is (i.e. who is getting paid by whom, for how much and for what services). All this has made plan sponsor fiduciaries no better off than the tourist at the “walnut shell game.”
 
No more. The new rule, which is tentatively schedule to become effective July 16, 2011, requires all service providers to provide sponsor clients with appropriate discourses.
 
The disclosures have three parts:
1.      Description of the services to be provided
2.      Status: The provider must state if it is a fiduciary, and if it is a Registered Investment Advisor under the Act
3.      Compensation: The provider must state what compensation it receives, either monetary or non-monetary (i.e. soft dollars, such as trips, office allowances, etc) and direct or indirect and from whom it will be received.
 
Major Problem: Neither the proposal nor the interim final rule requires the service provider to make disclosure in any particular manner or format. As a result the disclosures may be made through multiple documents, which could include prospectuses…think back to the “Pea-Guy!”
 
Opportunities: Communicate with existing clients. Now is the chance to write to your existing plan sponsor and make them aware of the disclosure requirement, before your competition does. Let them know you are on top of this and plan to meet with them to:
  1. Help them review all of their service providers fees and services
  2. Make them aware of any hidden fees they may not have know about (think soft dollar) and any indirect compensation you or another provider has been receiving that you have never disclosed
  3. Explain the nature of these indirect fees and their impact, if any, on fund and plan performance
  4. Review your service agreement (if you have one, and if you don’t, now  is the time to implement one) otherwise, you will be seen as the “Pea-Guy” by your competitors and ultimately you clients
  5. Negotiate fee reductions and improve services where prudent.
 
408(b)(2) disclosure requirements will have significant impact on some practices of service providers. RIA’s, Broker-Dealers, third party administrators and independent record-keepers will all be effected in different ways. Look for my future blogs to deal with each separately and drill a little deeper into the “shell” of the 408(b)(2) regs.

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