I have my 408(b)(2) fee disclosure . . . Now What?

Last Updated: August 01, 2012

It has been a few years since the Department of Labor introduced §2550.408b-2, the regulation requiring retirement plan vendor(s) provide plan fiduciaries with fee disclosures. This regulation stated that by July 1, 2012, plan fiduciaries should have received these fee disclosures from their retirement plan vendor(s). So, now that you’ve been provided this information, what should be done with it? Why do I have a 408(b)(2) fee disclosure? Over the years, retirement plan fiduciaries have expressed dissatisfaction with
being able to determine exactly what retirement plan vendors were earning. The goal of this newly effective regulation (§2550.408b-2) by the Department of Labor is to help provide fiduciaries with information that enables them to make well-informed decisions about their vendor’s services including the cost of those services. ERISA 408(b)(2) is not new. The purpose of the regulation is to provide an exemption from a prohibited transaction with a party in interest providing goods or services to a retirement plan. To have a prohibited transaction exemption, the contract or arrangement with the party of interest must be reasonable and provide goods and services necessary for the plan at a reasonable compensation. What do I do with my 408(b)(2) fee disclosure? There are two prevailing actions to take given the new regulation: 1. Ensure compliance with the new regulation 2. Use the information Ensure compliance with the new regulation Much has been written and summarized about compliance with the new regulation including: • what should be in the disclosure, • what should be done if the information is not complete, • what to do if a disclosure has not been received, • how to report a vendor that does not provide the information. Plan sponsors are required to ensure that service providers comply with the regulations. Fiduciary relief is available in the event a service provider fails to provide the required information. Use the information Use the information both prudently and effectively. Isn’t this why the regulation was implemented to begin with? While there is no prescribed method as to how the information must be used, the information should not merely be filed away once the fiduciary has ensured compliance with the regulation. For example, just because a vendor properly discloses all required information does not mean the fees are reasonable. Let me draw a conclusion about how a fiduciary will determine whether an arrangement with a vendor is reasonable: the plan fiduciary will have to go to market and obtain information from other vendors to compare to their current vendor. This may entail an RFI or benchmarking project. In some cases, a fiduciary may decide to conduct a formal, industry wide research project if it has been years since the vendor has been evaluated. Whatever the exercise, it would seem difficult for a fiduciary to represent the claim for reasonableness unless they have compared their current vendor to other vendors providing similar goods and services. The Next Big Thing At a recent industry conference, I was visiting with some other speakers stressing the importance of monitoring the plan’s vendor. The new 408(b)(2) regulation has heightened the attention given to fees, but it has not addressed how to make a meaningful evaluation among vendors. I have already reviewed many fee disclosure statements, and let me state for the record, there is currently no consistency in how the information is being provided. Under the regulation, vendors have a lot of liberty in how they actually provide the information. ERISA 404(a) outlines fiduciary duties as: • acting solely in the best interest of participants, • defraying reasonable expenses, • acting with care, skill, prudence and diligence of a prudent person. That being said, I believe the next big thing will be to require fiduciaries to establish a fair and meaningful process when they go to market for industry research to determine if they have a reasonable arrangement with their vendor. PCI’s archived blog entries are dated, the rules and statutes referenced may have changed. The analysis or guidance within these blog entries may have become stale, dated, or no longer accurate. PCI will not update or change these entries to reflect the latest analysis or development.


Chris Thixton, QPA, Principal



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