What Is a 408(b)(2) Fee Disclosure and Its Requirements?

Transparency in the management of retirement plans is important for participants’ financial security. The fees associated with these plans can significantly impact an individual’s retirement savings over time. Regulations exist to promote openness regarding these costs, helping those overseeing retirement funds make informed decisions. These regulations aim to provide clarity about the compensation received by various service providers, fostering an environment where plan fiduciaries can evaluate the value and cost of services.

Understanding the Disclosure Requirement

A 408(b)(2) disclosure is a document mandated by the Employee Retirement Income Security Act of 1974 (ERISA). It requires certain service providers to retirement plans to disclose information about their services and compensation. This enables plan fiduciaries to assess the reasonableness of fees and services, helping them uphold their duty to act in the best interest of plan participants.

These rules apply to ERISA-covered defined contribution plans, such as 401(k) plans, profit-sharing plans, money purchase plans, and most 403(b) plans. Defined benefit plans are also subject to these regulations. The Consolidated Appropriations Act of 2021 (CAA) also expanded 408(b)(2) to include certain group health plans, requiring similar disclosures for brokerage and consulting services.

The obligation to provide this disclosure falls on “covered service providers” (CSPs). A CSP is any service provider expecting to receive $1,000 or more in direct or indirect compensation for services to a covered plan. This includes fiduciaries, investment advisors, recordkeepers, brokers, accountants, auditors, and third-party administrators.

The disclosure is intended for “responsible plan fiduciaries” (RPFs), who are individuals or entities with authority over plan service contracts. Plan sponsors often serve as RPFs and are responsible for ensuring fees are reasonable for services provided. The disclosure helps them fulfill their ERISA fiduciary duties to monitor plan services and fees.

Details of Required Disclosures

Covered service providers must furnish detailed written disclosures to responsible plan fiduciaries. This includes a description of the services the provider expects to render, such as recordkeeping, investment management, administration, actuarial services, legal counsel, and auditing. This helps fiduciaries understand the scope of support they will receive.

The disclosure must also detail all compensation the service provider expects to receive, categorized as “direct” or “indirect.” Direct compensation refers to fees paid directly from the plan or participant accounts. This can include per-participant fees, asset-based fees, or specific transaction charges.

Indirect compensation is money received from sources other than the plan or plan sponsor, such as revenue-sharing payments, 12b-1 fees, or sub-transfer agency fees. For indirect compensation, the disclosure must identify the services, the payer, and the arrangement between the payer and service provider. This information helps fiduciaries identify potential conflicts of interest.

Compensation paid among related parties, such as affiliates or subcontractors, also requires disclosure. This includes charges against a plan’s investment or those set on a transaction basis. Information regarding investment funds or products offered must be provided, including sales charges, redemption fees, and annual operating expenses.

The disclosure should explain how compensation will be received, whether through direct invoicing or deductions from plan accounts. Service providers must also disclose any fees associated with service termination and how prepaid amounts would be refunded. If there are changes to disclosed information, the service provider must update the disclosure as soon as practicable, typically within 60 days.

Fiduciary Responsibilities Regarding Disclosures

Upon receiving 408(b)(2) disclosures, responsible plan fiduciaries have specific obligations. They must ensure timely receipt of these documents, ideally before entering into or renewing a service contract, or annually thereafter. Fiduciaries are responsible for confirming they have received complete disclosures from all covered service providers.

A thorough review and understanding of the disclosed information is necessary. Fiduciaries should examine details related to fees, compensation, services, and potential conflicts of interest. This includes comparing the disclosure information with the terms outlined in the service agreement and invoices to ensure alignment.

Fiduciaries are required to assess the reasonableness of the compensation and services provided. This means evaluating whether the fees are reasonable for the services received, not simply selecting the cheapest provider. This assessment may involve benchmarking fees against similar plans or industry standards, considering service quality and plan complexity.

If disclosures are not received or are incomplete, the fiduciary must take action. This includes demanding the missing information from the service provider. If the requested information is not provided within 90 days, the fiduciary may need to consider terminating the contract or reporting non-compliance to the Department of Labor (DOL).

Documentation of the entire review process is important. Fiduciaries should maintain records of their assessment, including notes and decisions made, to demonstrate due diligence and compliance with their responsibilities. This documentation supports the fiduciary’s prudent process. Ongoing monitoring of service providers and their fees is also required to ensure continued reasonableness and alignment with the plan’s needs.