What Is a 408(b)(2) Disclosure for Retirement Plans?

A 408(b)(2) disclosure brings transparency to the fees and compensation associated with services provided to retirement plans. This disclosure helps plan fiduciaries understand the costs and arrangements involved in managing retirement savings.

Understanding the 408(b)(2) Disclosure

The 408(b)(2) disclosure is a report mandated by the Employee Retirement Income Security Act (ERISA) of 1974. Section 408(b)(2) of ERISA outlines an exemption to prohibited transaction rules, allowing plans to pay service providers if the services are necessary and the compensation is reasonable. To ensure this reasonableness, the Department of Labor (DOL) established regulations requiring certain service providers to furnish specific information to plan fiduciaries.

The disclosure’s purpose is to provide plan fiduciaries with a comprehensive understanding of all fees, potential conflicts of interest, and the services rendered. This information allows fiduciaries to assess whether the costs are reasonable in relation to the services received. By requiring this transparency, the disclosure helps plan sponsors fulfill their fiduciary responsibility to plan participants and beneficiaries. It promotes accountability and protects participants’ interests.

Plan fiduciaries have a legal obligation to manage the plan prudently and solely in the best interest of participants and beneficiaries. The 408(b)(2) disclosure aids fiduciaries in meeting this duty by clarifying financial arrangements with service providers. Without this transparency, it would be challenging for fiduciaries to evaluate the costs of plan administration and investment management effectively. The disclosure ensures that plan fiduciaries possess the necessary data to make sound judgments regarding the selection and ongoing monitoring of plan service providers.

Identifying Covered Service Providers

The requirement to provide a 408(b)(2) disclosure applies to specific entities known as “covered service providers” (CSPs). A CSP is defined as any service provider that enters into a contract or arrangement with an ERISA-covered retirement plan and reasonably expects to receive at least $1,000 in either direct or indirect compensation for their services. The regulations apply to most defined contribution plans, such as 401(k) and 403(b) plans, and defined benefit plans.

CSPs generally fall into several categories based on the services they provide. These include plan fiduciaries or registered investment advisors who offer services directly to the plan. Recordkeepers and brokerage firms that provide platforms for participant-directed investments are also considered CSPs. Additionally, other service providers who expect to receive indirect compensation for a broad range of services, such as accounting, actuarial, legal, consulting, banking, or third-party administration, are included.

Not every vendor or individual providing services to a retirement plan is classified as a covered service provider. The focus is on those who provide services critical to the plan’s operation, asset management, or those who receive substantial compensation, particularly indirect forms.

Key Information Within the Disclosure

A 408(b)(2) disclosure must contain information for plan fiduciaries to fulfill their oversight responsibilities. A primary component is a clear description of the services the provider will render to the plan. This includes services such as recordkeeping, investment management, administrative support, or consulting. The disclosure also specifies if the service provider will act as a fiduciary or a registered investment advisor to the plan.

The disclosure details all compensation the service provider expects to receive. This compensation is categorized into direct and indirect forms. Direct compensation refers to explicit fees charged directly to the plan or deducted from participant accounts. Examples include fixed administrative fees billed to the plan or asset-based fees explicitly deducted from plan assets. Indirect compensation, conversely, is money received from sources other than the plan or the plan sponsor.

Common forms of indirect compensation include revenue sharing, 12b-1 fees, sub-transfer agency fees, and float income. Revenue sharing involves payments from mutual funds to service providers, often based on assets invested in the fund. 12b-1 fees are paid by mutual funds to broker-dealers for distribution and marketing support, with a portion potentially passed to financial advisors. Sub-transfer agency fees are paid by mutual funds to recordkeepers for services like maintaining account balances and processing transactions. Float income refers to earnings on temporary cash balances awaiting investment or disbursement.

For indirect compensation, the disclosure must identify the services for which it is received, the payer of the compensation, and the arrangement between the payer and the service provider. Compensation paid among affiliates or subcontractors of the covered service provider must also be disclosed, especially if it’s transaction-based or charged against investments. Additionally, the disclosure outlines any compensation expected upon termination of the contract, including how prepaid amounts will be calculated and refunded.

Disclosure Timing and Plan Sponsor Review

Covered service providers must adhere to specific timing requirements for delivering the 408(b)(2) disclosure. The initial disclosure must be provided to the responsible plan fiduciary reasonably in advance of entering into, extending, or renewing a contract or arrangement. This ensures fiduciaries have time to review information before committing. For investment-related information, disclosures of changes must be made at least annually.

Beyond the initial disclosure, providers are generally required to disclose changes to the information as soon as practicable, but no later than 60 days from the date they are informed of such changes. If there is an inadvertent error or omission, the correct information should be disclosed as soon as practical, typically within 30 days of the error being known to the service provider. The disclosure can be furnished in writing or through electronic means, provided the information is readily accessible to the plan fiduciary and they receive clear notification on how to access it.

Upon receiving the 408(b)(2) disclosure, the plan sponsor, acting as a fiduciary, has a responsibility to review and assess the information. This review is a procedural step in fulfilling their duty to ensure that the services provided are necessary and that the fees are reasonable. Fiduciaries should compare the disclosed information against the terms outlined in their service agreements and invoices to ensure alignment. Fiduciaries may compare disclosed fees with industry averages or other available data to determine reasonableness. Plan sponsors must retain all disclosures for record-keeping, as this documentation demonstrates their adherence to fiduciary responsibilities.