With the deadline fast approaching for the final regulation on408(b)(2) fee disclosure to take effect, there are a number ofareas where difficulties could arise—as is the case with any newattempt at regulation. Requirements to provide data, estimatecosts, and determine what is and isn't necessary, and from whom,all offer opportunities for businesses on both sides of the issueto go astray.

From unintended consequences to misunderstandings to shortfallsin communications, here are some areas to watch starting July1.

What's required

One concern, which emerged in comments on the interim rule, hasto do in a broad sense with what constitutes required information.Specifically, providers wanted to know how the Department of Laborwould treat instances in which plan fiduciaries request informationfrom covered service providers who believe the information is notspecifically required under the fee disclosure rule and thereforedon't want to provide it.

DOL has taken the position that, if a fiduciary needsinformation to make an informed decision in selection or monitoringa service provider, the fiduciary is governed by ERISA Section 404rules and is required to request that information. Should a serviceprovider refuse or fail to deliver the information, the onus wouldbe on the fiduciary to discontinue or refuse to enter a servicecontract or arrangement with that service provider. Therequirements of the one are independent of the other, and DOL hassaid the disclosure rules should be interpreted broadly to makesure fiduciaries review any arrangement with a provider based oncomprehensive information.

The method of disclosure itself could be an issue, according toBeth Dickstein, a partner in the employee benefits group at lawfirm Sidley Austin. While DOL has said it would issue additionalguidance regarding how fees are to be disclosed, it hasn't done soyet. Many firms are taking a wait-and-see attitude about preparingand finalizing disclosures, while others are following the sampleprovided by the Employee Benefits Security Administration on theirwebsite. It isn't required to follow the sample, but it doesindicate a way in which to inform fiduciaries where to find avariety of required data that might be located in numerouslocations.

Cost control

Another issue is that plan fiduciaries might not be aware ofsome of the costs involved in retirement plans, and might not knowhow to evaluate them. With regard to recordkeeping, Dickstein says,the regulations say that when there's no stated charge, the recordkeeper has to come up with a good-faith estimate of the cost. Thereis some concern, she says, that such charges might be confusing toplan fiduciaries for two reasons. First, some might not be awarethey were paying for recordkeeping at all. That could have thepotential result of causing disagreements between fiduciaries andrecord keepers over the charges themselves.

Second, they might not know how to judge whether such chargesare fair and typical within the industry.

There's also the possibility record keepers themselves couldchoose a figure that isn't truly representative of the cost of theservice—particularly if the number overstates the cost. There areother factors that could make the estimating of recordkeeping costsdifficult: if, for instance, it's offset or rebated based on someother compensation received by the covered service provider, anaffiliate, or a subcontractor. But the requirement still exists,and the service provider must find a way to estimate the cost, aswell as to explain how the estimate was calculated.

Covered service providers themselves can be an issue, since someservices, such as accounting, legal and actuarial services, can bepaid indirectly. Certain record keepers set up expense accounts tobe used by plan sponsors to pay administrative expenses of theplan, including expenses for these services. If the expenses arepaid from such accounts, rather than directly by the plan or theplan sponsor, the persons providing such services could becomecovered service providers because of the way the payment for thefees is funded. However, depending on how checks are cut, thosethird parties might be unaware of their status.

An indirect problem

Indirect compensation is another area in which there ispotential for misunderstanding. Covered service providers must notonly disclose indirect compensation, but also the services forwhich the indirect compensation is received and who is paying.While the interim rule did not require it, the final rule mandatesthat, in addition, the arrangement between the payer and thecovered service provider, an affiliate, or a subcontractor, asapplicable, be disclosed as well, pursuant to which the indirectcompensation is paid.

That way, the plan fiduciary will be able to see potentialconflicts of interest that could arise out of the indirectcompensation. The covered service provider has to describe itsarrangement regarding such compensation so that the responsibleplan fiduciary can see why the service provider is being paid bywhat could otherwise appear to be an unrelated third party, and howit relates to the covered plan.

Originally examples of such instances were included in the rule,but DOL chose instead to rely on fuller disclosure of thecircumstances under which the covered service provider will bereceiving compensation from parties other than the plan or the plansponsor. This was done in the interests of avoiding too broad ascope of the earlier proposed conflict of interestrequirements.

However, DOL also intends the concept of such compensation, tobe received by a covered service provider or its affiliates orsubcontractors, ''in connection with'' a particular contract orarrangement for services, to be construed broadly as well. It citesthis example in a conflict of interest report prepared by itsOffice of Inspector General:

“A service provider failed to disclose that some financialinstitutions had subsidized attendance costs at a conference thatthe provider had offered for its clients. While plan sponsorattendees were charged a registration fee of $850 that was to helpdefray conference costs, at the same time the financial institutionsubsidized the conference with a fee of $20,000.

Since the service provider was providing consulting services toa plan or plans, if it received subsidies or other remunerationfrom bodies about which it might make recommendations, thosesubsidies or other remuneration would be received “in connectionwith” the service provider's contract or arrangement with thecovered plan and would require to be reporting.

Dickstein points out another area of concern. That's whether abroker-dealer would be able to properly identify the payer ofindirect compensation in connection with brokerage windows. Whilethe provider of the brokerage window is supposed to discloseindirect compensation through several types of investments thatplan participants can make, the provider will not know up frontwhich of those investments a participant will choose.

Dickstein says the question is what companies will do with thisdisclosure once they get it. Smaller companies will have a hardertime knowing what to do with the information. Still, they shoulddocument they've reviewed it, she says, and that they've evaluatedwhether the fees are reasonable. But smaller clients, she says, whomight not be as savvy about such matters, could possibly be put inthe position of looking worse once the law takes effect “becausethey didn't notice that they were paying too much.”

However, she adds, what's happening is that the regulation isdriving down fees in connection with recordkeeping—but, she says,“it's sort of incidental rather than people actually negotiatingfor them.”