If you’re a financial advisor who provides 401(k) and other retirement plan services for business clients, this could be turning into a very hot summer indeed.

 July 1 marked the new federal deadline for supplying your business clients with so-called 408(b)(2) disclosures, a raft of information that includes what you’re charging them and what services you’re offering for your fees. They, in turn, have deadlines to meet at the end of August, when they must provide fee information to employees who participate in those plans—so they have an incentive to make sure you meet the cutoff date.

Haven’t gotten around to getting those letters out? You’re not the only one. Industry observers expect to know how many advisors are in trouble in the fourth quarter, when the U.S. Department of Labor will start getting complaints from plan sponsors. Missing the July 1 deadline could hurt. You run the risk of enforcement action from both the Labor Department—which could force you out of the retirement plan business entirely and require you to refund fees charged to your clients, plus interest—and the IRS, which could charge you taxes and penalties on that revenue.
 

David J. Witz, managing director of Fiduciary Risk Assessment LLC, a Charlotte, N.C. consulting and technology firm, says he believes that under the Obama administration, the Labor Department intends to be aggressive about enforcement.

“It is expected that they will make examples of people,” Witz says. In the fourth quarter, “I think we’re going to see the DOL be very active. If they live up to the hype and the claim that they’re going to enforce this, I think we’re going to see a lot of names showing up where people have reimbursed clients for, maybe not millions of dollars, but thousands of dollars that they’ve collected where they have not done any work.”

Advisors could still be obligated to return the money if they provided services but failed to deliver the disclosures, Witz adds.

About 51 million Americans had $3 trillion in 401(k) plans by the end of 2010, the Employee Benefit Retirement Institute says. More than 90 percent of retirement plans, however, have less than $2 million in assets, Witz says.

Although plan sponsors have fiduciary obligations to monitor their progress, most are small businesses whose financial executives may not be doing so closely.  Misinformation is rife, says Mike Lissner, a partner at Acropolis Investment Management, a registered investment advisor in St. Louis, Mo. that manages retirement plans for business clients. He believes more than half the sponsors think they’re getting the service for free.

“They don’t have the knowledge, the expertise, the people on staff who should have known,” Lissner says. When he reviews the plans of prospective clients and shows them what they’re paying, “Their eyes go wide.”

For many advisors, retirement plans have provided a good living. Fees typically are charged to the plan, not to the sponsor directly, so an employer may take less interest in what the plan actually costs. Advisors also may receive 12b-1 fees from mutual funds that they include in the offerings to the plan participants.

The opaque quality of the business led the Labor Department to issue new rules aimed at providing more transparency, in a manner that would allow sponsors to compare one service provider’s offering with another and determine who’s got the better deal (and whether the current provider has serious conflicts).

To ensure that the sponsors are engaged, the government requires them to provide fee disclosure information to their own plan participants by Aug. 30. Sponsors who didn’t receive fee disclosure information from their service providers by July 1, or who got incomplete information, must contact the providers and demand it.

If they haven’t gotten the disclosures within 90 days, they have to report the advisor to the Labor Department. Sponsors who are lax in their handling of the process may be deemed liable in any fiduciary failures in the plan resulting from the advisors’ mismanagement.

Witz says registered investment advisors are less likely to run afoul of the rules, since they’re used to signing client contracts that spell out the services they will offer.  But registered reps at broker/dealers typically operate on commissions and rarely provide service agreements, he adds.

Witz foresees some difficult conversations ahead between certain brokers and their sponsor clients.

“It’s a relationship business. Most of that business is sold with really very little service rendered after the sale…I take you to my summer home once a year, we go deep-sea fishing, maybe golfing a couple of times. Well, I can’t put that in a disclosure report.

That’s not a legitimate expense for the plan,” Witz says. “So I have to communicate services that I’m going to deliver. Well, maybe I haven’t delivered any services for 10 years, outside of entertaining you.

“Now I’ve created a relationship based on services to be rendered for fees received that I’ve never delivered and am unlikely to deliver in the future. So now you’ve put the plan sponsor in an awkward spot. Because (sponsors) have to assess whether these fees are reasonable for services rendered, and if I say, ‘My fees are reasonable for 10 services but I only delivered one,’ then my fees aren’t reasonable. And you either have to pursue me to get the money back, and/or fire me, or you get the money back and you go on from there.”

Rob Cirrotti, a director at Pershing who manages the retirement and long-term savings solutions team, says the retirement plan management business has been moving more toward advisors who specialize in the practice, and away from advisors for whom it’s a sideline. He sees opportunities for the specialists—for example, helping sponsors navigate hard-to-understand disclosures, which will strengthen their relationship.

Advisors who manage just a handful of plans will feel more pressure, Cirrotti says.

“The unknown is how quickly these advisors will really feel that bull’s-eye on their plans and on their business,” he says. “That’s one of the things that still has yet to play out—how quickly these books of business will come under fire and they will find themselves either successfully, or more likely unsuccessfully, defending the business they have.”