Working through the technical terms of 408(b)(2) is not much different than putting together a picture puzzle. There are a lot of pieces which fit together in some very precise ways. But, in the end, the disclosures which are required are pretty straightforward and-even given the work needed to describe certain ”wrapped” services and estimating their costs- can be made very simply. Keep in mind Asimov’s concept of “Minimum Necessary Change," upon which I blogged a while back.
Long pages of disclosure are not necessary or warranted.
There are certain keys to making it work, and making the disclosure simple. Keep a few things in mind:
- Are you really a “Covered Service Provider” (CSP) that has to make a disclosure (see, for example, my piece on annuity investment accounts)? Remember, a CSP has a direct contract or arrangement with the plan, and that is the party that has to disclose-and only certain service providers are subject to disclosure rules. So, for example, a TPA which doesn’t maintain the financial records (such as where a 401(k) plan is funded with allocated group annuity contracts; or for most 403(b) plans which are funded with individual annuity and custodial contracts); whose fees are paid directly by the employer or the plan; and for which the TPA doesn’t receive 12b-1 fees, commissions, or other indirect compensation are not CSPs and need not disclose under the new reg.
- Are you an affiliate or a subcontractor? If so, you don’t need to disclose, but the CSP needs to disclose what they pay you. This generally may include insurance agents who sell annuity contracts to 401(k) or 403(b) plans, and who are likely to be "subcontractors" because of their servicing the contract with things like enrollment services.The caution to those folks: make sure you understand what the actual CSP is saying about you.
- Make sure you are a “recordkeeper” before you commit to making financial disclosures. Many TPA’s are not 408(b)(2) recordkeepers on much of their business.
- Keep the disclosures simple, short and sensible. Check existing documents first, as most of the required disclosures may already be in the existing service agreement, policy or other existing agreement.
- For those who will receive indirect comp from a number of sources, try to standardize what you say about them, and create a short disclosure statement. Only send to those plans which generate that comp.
- Over-disclosure is as bad as under-disclosure. Review and edit the description of indirect comp programs that others give you, to make sure it actually applies to you and properly describes your role in it all.
- Tweak your contract form to accommodate what you say in the disclosure, if necessary. Many existing contracts will not need to be changed to meet the rules. Even then, however, consider incorporating some helpful changes when renewing the contract.
It does get a bit messier where data on the underlying investment needs to be disclosed, but even this is straightforward and can be simply made from existing data from accessible sources, and can be made in a standardized format.
Follow these guidelines, and you may be surprised with how simple the 408b2 disclosures may really be.
Any discussion on any tax issue addressed in this blog (including any attachments or links) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any transaction or tax-related position addressed therein. Further, nothing contained herein is intended to provide legal advice, nor to create an attorney client relationship with any party.