Every year brings something new in this business, but the changes you'll see this year - and the ones you'll be anticipating - could be dramatic. That's thanks to a bevy of new regulations, some final and some still in the proposal stage, from the Department of Labor.

The retirement industry will spend 2011 digesting and implementing new final rules on fee disclosure. At the same time, we'll be keeping a watchful eye on a proposed regulation that could mean sweeping changes for what it means to be a fiduciary for retirement plan investment advisers. And these regulatory changes are happening against a backdrop of ongoing calls for legislative changes to the current retirement system.

So what's a financial professional to do? While changes undoubtedly bring additional challenges, they also bring significant opportunities. Preparation is the key. Financial professionals who get informed and plan ahead can use the changes to demonstrate their value, service and expertise.


New fee disclosure regulations

The DOL has issued separate rules for disclosing fees to plan sponsors and for communicating fees to participants. The goal is to increase transparency and uniformity in fee reporting. While both rules provide opportunities for financial professionals, the regulation covering disclosure to plan sponsors has perhaps the most direct and significant impact because it will require most financial professionals to take specific action.


Disclosure to plan sponsors

As of July 16, 2011, most financial professionals who work with retirement plans - including brokers, registered investment advisers, insurance agents, financial planners and other plan service providers - will be formally required to disclose to their plan sponsor clients the fees they receive and the services they provide. They will also be required to state if they are a fiduciary and if so, for which services.

The new rule applies to both new and existing service arrangements with any retirement plan subject to ERISA. It requires financial professionals to disclose two levels of fees:

* Direct compensation. This is compensation received directly from the covered plan, not from the plan sponsor. It may be a good practice to disclose payments from plan sponsors anyway in the spirit of transparency.

* Indirect compensation. This is compensation received from any source other than the covered plan, the plan sponsor, the service provider, an affiliate or a subcontractor (e.g., compensation received from investment funds, such as 12b-1 fees and commissions, and compensation received from other service providers, including finder's fees, gifts and entertainment expenses).

While there is no specific standard for the level of detail for describing services, it would be wise to provide a reasonably detailed description of the services you offer - and the services you will not offer. This information can help you deepen your relationship with existing clients. It can also be helpful as a prospecting tool for engaging new clients, who will clearly understand your fees and service offerings.


Steps to take now

While there is plenty of time before the plan sponsor disclosure regulation takes effect, financial professionals should start preparing now.

* Learn as much as you can about the regulations and how they might impact you and your clients. Recommended reading includes two white papers by noted ERISA attorney Jamey Delaplane, partner, Davis & Harman LLP: New Fee Disclosure Rule for Retirement Plan Service Providers: What Financial Professionals Need to Know and New Participant Fee Disclosure Rules: What Plan Sponsors Need to Know, available at principal.com/feedisclosure.

* Consider what your clients may or may not know now. Ask yourself questions like, "Do my clients understand how I'm paid? Do they understand how much I'm paid? How do I make sure my clients appreciate the value I provide? And do they understand whether or not I'm a fiduciary?"

* Evaluate how your disclosures to clients may need to change and whether the new rules will have any significant effects on your business model.

* Find out how your broker-dealer or registered investment adviser firm will handle compliance. Consider contacting legal counsel for help if you don't have access to compliance support.

* Review the covered plans in your client base. Determine in which plans you are considered a covered service provider.

* Identify the categories of covered service provider in which you fall. Review any services you may provide as an ERISA fiduciary or an RIA.

* Keep an eye on developments. The plan sponsor regulation is an interim final rule, which means the DOL may provide additional guidance. By being prepared, you can also help plan sponsors understand the disclosures they are getting from all covered service providers.


Disclosure to plan participants

While this rule applies to plan fiduciaries and sponsors, it does give financial professionals an opportunity to help clients review plan investment options, comply with the requirements and address participant concerns. The final regulations require plan fiduciaries to disclose certain plan, fee and investment-related information to participants and beneficiaries.

As with the plan sponsor regulation, this rule is intended to make sure participants have the information they need to make informed decisions - in this case, about the management of individual accounts held for their benefit and the investment direction of their retirement contributions.

The DOL offers a model format and chart as a guide for disclosing investments. You can find it, and a summary of the regulation, at dol.gov/ebsa.

The changes take effect for plan years beginning in November 2011 and later. That means most participants will see the new information on their first quarter 2012 statements.

That new information is likely to raise a lot of questions. It may be the first time participants will see fee disclosures on their statements. You can help your clients by anticipating questions and developing answers. Some plan sponsors may want to change the way fees are paid. That presents another opportunity for financial professionals to offer support and guidance.

Without a thoughtful fee collection method, plan sponsors risk adversely influencing participant behavior. That's why it's important that you help the plan sponsor and participants understand what the fees are, whether or not they're competitive and what might influence changes to these fees.

You will also want to review how you receive compensation from the plan. If your fee is deducted from or netted against plan assets, those fees will be illustrated on participant statements.


On the horizon: New definition of fiduciary

As the industry digests the final fee disclosure rules, we're also bracing for another potentially significant change - a new definition of what it means to be a fiduciary. The DOL's proposed regulation generally expands the types of activities that would make a service provider - like a pension consultant or financial asset appraiser - an ERISA fiduciary when giving investment advice to plans and participants.

Once the regulation is final, it's likely that many more financial professionals will be considered ERISA fiduciaries.

What does it mean to you now? If you currently are not taking on a fiduciary role, you will want to consider the significant impact of doing so if the final regulation requires it. Check with your legal or compliance contacts to learn more.


Keeping your eye on the ball: Retirement security

Despite the regulatory changes, this is still a critical time to stay focused on one of our most important responsibilities - helping Americans achieve retirement security. Financial professionals can provide tremendous value by helping each sponsor define the plan's objectives and goals and then help them find ways to achieve those results.


The silver lining

There's no doubt that the new regulations will mean extra challenges for financial professionals in 2011. But the silver lining is the tremendous opportunity to be of service to your clients. Start preparing today!

Burrows is senior vice president - retirement and investor services, at the Principal Financial Group.

Register or login for access to this item and much more

All Employee Benefit Adviser content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access