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What will actually happen to 408(b)(2) violators?
By Louis S. Harvey, CEO Dalbar, Inc. on Sep 24, 2012


Reasonably Expects to Receive?

In evaluating 408(b)(2) disclosures, it is amazing to see how many openly violate a key provision of the regulation. The regulation explicitly requires that each covered service provider describe both the direct and indirect compensation it “reasonably expects to receive”.

The most frequent violation noted to date has been the disclosure of all possible compensation, without the inclusion of the compensation that the covered service provider “reasonably expects to receive”. The erroneous interpretation of all possible compensation has been taken to a level of absurdity that makes it almost impossible for a responsible plan fiduciary to perform the required evaluation of the service arrangement.

Lists of possible fees have reached the point that they are meaningless. Consider the example of the inclusion of a fee for a checkbook cover! This is not a joke. There are documents that claim to comply with 408(b)(2) that list checkbook cover fees as compensation that the covered service provider expects to receive from every plan being serviced.

While this sort of generic disclosure may be an attempt to qualify as a “best effort” to comply, it should be obvious to even those with the meanest of intelligence that such disclosures are only a best effort to obstruct a fee evaluation.

The larger question is what the consequences are for such flagrant violation of a regulation that requires disclosure of reasonably expected compensation?

On one hand, if regulators do not act, then the billions of dollars spent on fee disclosure will have been utterly wasted. It would also give a green light to ignoring future regulations. In addition it would mean that the recently hired enforcement staff will not have very much to do and have no results to show.

On the other hand, if regulators do act, they are most likely to make a public spectacle of violators but then give them an opportunity to voluntarily correct the failures. In this more likely scenario, the covered service providers that failed to disclose their expected compensation will be faced with the public embarrassment and the potential loss of credibility that usually follows.

A prudent covered service provider that has not made the proper disclosure should, at a minimum, consider a response to the inquiry from the DoL/IRS that asks, “Have you disclosed to each plan what compensation you reasonably expect to receive from that plan?”

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Created by Prudy in 11/9/2012 10:23:53 PM
It's great to read something that's both enjoyable and provides pragamtsidc solutions.

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Louis S. Harvey
President & CEO
 

 

 

Founder and leader of Dalbar, Lou Harvey is relentless in the search for the forces that are shaping the world of financial services today, tomorrow and for years hence. Using Dalbar’s research capabilities, Lou Harvey seeks insights from inside and outside the industry to understand and anticipate changes in customers’ needs and the ways products are distributed.

 

Read more about Lou on www.dalbar.com

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