408(b)2 Fee Disclosures — Are You at Risk?

The Department of Labor’s 408(b)2 fee disclosure regulations went into effect July 1, 2012. As a requirement under these regulations, plan sponsors were supposed to receive notices from all covered service providers (CSPs) detailing services provided, fees charged and any potential conflicts of interest. These regulations apply to ERISA defined contribution and defined benefit plans.

A CSP is a provider that expects to receive at least $1000 in direct or indirect compensation for services provided to the plan. One of the purposes of this regulation was to help plan sponsors assess whether the fees they were paying for certain services were reasonable. You can find more detail on the regulation on the DOL website (www.dol.gov).

Unfortunately, there was no standardization of the format for these 408(b)2 disclosure notices resulting in extremely confusing information for even well-informed plan sponsors. As a result, the DOL has recently proposed a follow up guide to be issued with disclosures that would summarize or help explain the disclosures from service providers. That proposal has not been finalized as of April 2014, but RPS will continue to monitor its progress and keep our clients informed of any notable news.

In addition to making sure notices are received from ALL covered service providers, there is an inherent obligation on the plan sponsor to actually do something with these notices. In the event of a DOL audit, you will likely be asked what you did with the notices you received. So, just filing them away is not a good strategy. How do you determine if, indeed, the fees you are paying for services are reasonable? Did you address any potential conflicts of interest? What was the process you employed to determine this? Is it documented? A good advisor will help walk you through this process.

The failure to provide these disclosure notices can result in the arrangement becoming a prohibited transaction for the advisor or service provider. If you as the plan sponsor did not receive a disclosure from a CSP, this, too, can result in a prohibited transaction unless you take action to contact the service provider(s) and request the missing disclosures. Then you will have to evaluate whether they meet the requirements of the regulations. If a service provider does not comply within 90 days, you must inform the DOL and terminate that relationship.

The 408(b)2 fee disclosure regulations were certainly established to bring clarity to the issue of 401k plan fees. However, many plan sponsors we have talked to still don’t understand the amount or structure of the fees involved with their plan. That’s when having a 3(38) fiduciary on your side to ensure transparency can really provide a benefit to you and your employees.