Message from the Firm

By Fred Reish

Summer is over. Labor Day has come and gone. Kids are back in school. The summer lull has come to an end.

We are now back into the swing of things and the next few months promise to be very active for 401(k) plans and their advisers.

The first event will probably be the release of the new 5500 reporting package, with the most significant change for advisers being the disclosure of all direct and indirect compensation on Schedule C. (Note that Schedule C only applies to plans with more than 100 participants.) In all likelihood, the new Schedule will require the most extensive reporting of indirect payments-like revenue sharing, including 12b-1 fees and subtransfer agency fees-that we have seen so far. The change will probably be effective for the 2009 plan year. However, now is the time to be explaining revenue sharing to plan sponsors and fiduciaries.

The next step will be the release of the final QDIA regulations for default investments. I expect those will be out within the next 30 days. I believe the ultimate impact of the QDIA guidance will be to significantly divert 401(k) cash flows from single asset class mutual funds into multi-asset class vehicles, such as lifestyle funds, lifecycle funds and managed accounts. I would not be surprised if, three to five years from now, over half of the cash flows into 401(k) plans were going into those vehicles. Succinctly stated, it will be revolutionary.

The third shoe to drop will be the new 408(b)(2) proposed regulation. It will require "point-of-sale" disclosure by advisers and providers of all fees and other revenues from parties related to the plan. In that sense, it is a companion to the new Schedule C. However, it will apply to ERISA plans of all sizes (and not just to those with over 100 participants).

Depending on how much detail is required, the proposed regulation could go a long ways towards bringing true fee and expense transparency to 401(k) plans. However, if the DOL permits broad descriptions (without telling plan sponsors how they can get actual cost and revenue information), the impact may be less than hoped for. I expect the proposed regulation will provide for a 2009 effective date. That is, the first transactions covered by the final regulation would be those occurring after December 31, 2008. Once again, though, now is the time to be providing point-of-sale disclosure to plan sponsors.

We will also be getting more information on the 401(k) litigation front, as those class action lawsuits progress (and probably multiply), as well as Congressional hearings on fees and expenses.

As you can see, fees, expenses and revenue sharing will continue to be high on the list of headline issues.

The fate of PPA fiduciary advice remains uncertain. While the DOL has given some helpful guidance, many important questions are unanswered. At this time, it is hard to have a high degree of comfort of compliance without more guidance. As a result, we do not see significant progress on that front in the near future.

Those are just some of the issues that are swirling around. The last part of 2007 and the first part of 2008 promise to be both very interesting and very busy.

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